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Gold Surges on Easing Inflation, Weaker US Retail Sales

Potential Rate Cuts Boost Gold Prices

by Victor Adetimilehin

Gold prices surged on Wednesday, reaching their highest level in nearly a month. This surge follows the release of positive economic data in the United States, which fueled expectations of an interest rate cut by the Federal Reserve later this year. A potential rate cut is generally seen as positive for gold prices.

Gold Prices Rise on Upbeat US Economic Data

By mid-morning on Wednesday, spot gold prices had climbed 1.1% to $2,384.76 per ounce, marking their highest point since April 21st. US gold futures also experienced a significant increase, reaching $2,387.20 per ounce in New York, reflecting a 1.2% jump. This comes after a period of relatively flat trading for the precious metal in recent weeks, following a significant rally earlier in the year that saw gold prices hit record highs.

Despite this recent consolidation, gold remains up roughly 14% year-to-date. This growth is attributed to a confluence of factors, including increased central bank purchases of gold, heightened geopolitical tensions on the world stage, and rising consumer demand for gold in China. Notably, gold has maintained its strength even as the anticipated timing of a policy shift by the Federal Reserve has been pushed back.

Economic Data Fuels Rate Cut Speculation

The latest economic data released from the United States provided some welcome news for policymakers contemplating interest rate cuts in 2024. Financial markets are now factoring in a 69% chance of a rate cut by September, according to data from the CME FedWatch tool. This shift in sentiment is largely due to signs of easing inflationary pressures.

A key measure of underlying inflation, the core consumer price index, showed its first decline in six months for April. This index, which excludes food and energy costs, rose just 0.3% compared to the previous month. Analysts view this as a potential signal that inflation may continue to cool down over time, potentially paving the way for the Fed to enact its first rate cut this year.

Separate data released on Wednesday indicated that US retail sales stagnated in April. This suggests that rising borrowing costs and mounting consumer debt are encouraging Americans to be more cautious with their spending. Economic weakness can benefit gold, as it is often viewed as a safe-haven asset during times of financial uncertainty. Investors tend to flock to gold during these periods, driving up its price.

However, analysts believe that for gold prices to reach new record highs, a clearer picture regarding the number of potential rate cuts is needed. This is due to the anticipated positive impact of rate cuts on the demand for gold-backed exchange-traded funds (ETFs). So far this year, investors have been net sellers of gold ETFs, with total holdings down by nearly 6%.

Investor Caution Regarding Rate Cuts and ETF Demand

While the recent economic data is positive for gold prices, some uncertainty remains. Investors are cautiously watching the Federal Reserve’s actions, particularly the number of potential rate cuts this year. A clearer picture on this front would likely influence the demand for gold-backed ETFs, which could significantly impact gold prices.

In addition to potential rate cuts, other factors continue to support gold prices. Geopolitical tensions around the world remain high, which can also drive investors towards gold as a safe-haven asset. Additionally, central banks around the world have been increasing their gold purchases in recent years, further bolstering demand for the precious metal.

The near-term direction of gold prices will likely depend on the Federal Reserve’s monetary policy decisions and how geopolitical events unfold. If the Fed signals a more dovish stance and cuts interest rates, gold prices could continue to climb. Conversely, a more hawkish stance from the Fed or a significant easing of geopolitical tensions could put downward pressure on gold prices.

Source: Mining.com


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