Gold price extends upside as Fed policymakers expect that higher bond yields could be substituted for further rate hikes.
The release of FOMC minutes and PPI data are expected to trigger volatility.
Fed’s Bostic sees current monetary policy as sufficiently restrictive and believes inflation will come down to 2% without triggering a recession.
Gold price (XAU/USD) holds onto gains despite the hotter Producer Price Index (PPI) report for September. The monthly headline PPI grew at a higher pace of 0.5% against expectations of 0.4% and the core PPI expanded at a higher pace of 0.3% vs. expectations and the former release of 0.2%. On an annualized basis, the headline PPI accelerated to 2.2%, higher than expectations of 1.6% and the former reading of 2%. The prices of core goods and services at factory gates jumped to 2.7%. A hotter PPI report indicates that robust consumer spending forced producers to raise prices of goods at factory gates.
The precious metal extended its rally on Wednesday as Federal Reserve (Fed) policymakers continue favoring steady interest rates at the 5.25 to 5.50% range through year-end. The precious metal is also capitalizing on the deepening conflict between Israel and Hamas, which could extend beyond Gaza. Investors should be prepared for volatility in the Gold price ahead as Federal Open Market Committee (FOMC) minutes from the September meeting and inflation data for the same month are due.
Bullion remained the first choice of investment this week as Fed policymakers signaled support for an unchanged interest rate policy due to a multi-year high in US Treasury yields. FOMC members expect that higher bond yields could be substituted for further rate-tightening as the pace of spending and investment could slow down due to higher borrowing costs.
Daily Digest Market Movers: Gold price strengthens despite hot PPI report
Gold price seems bullish near a fresh weekly high at $1,870 despite a surprisingly hot producer inflation report.
The monthly headline and core PPI grew at a higher pace of 0.5% and 0.3% respectively. US producers raised prices of goods and services at a higher pace in September due to strong consumer spending.
This could set a hawkish undertone for the Fed’s November monetary policy meeting.
The Gold price is expected to remain volatile ahead of the release of the FOMC minutes.
The release of the FOMC minutes for the September monetary policy is expected to provide a detailed explanation behind a steady interest rate decision. Apart from that, the outlook on inflation and interest rates will be keenly watched.
For US producer inflation, investors expect monthly headline PPI to expand at a slower pace of 0.4% against 0.7% recorded in August. The core PPI is seen growing at a steady pace of 0.2% in the same period.
On an annualized basis, headline PPI is foreseen steady at 1.6%. The Core PPI accelerated marginally to 2.3% against the former reading of 2.2%.
The precious metal has witnessed significant investment from investors this week amid the conflict in Israel/Palestine. The appeal for Gold remains upbeat as a firmer risk-aversion theme improves demand for safe-haven assets.
In addition to higher demand for safe-haven assets, neutral interest rate guidance from Federal Reserve policymakers has kept the Gold price upbeat.
On Tuesday, San Francisco Fed Bank President Mary Daly said that the risk of over-tightening is not expected to outweigh the risk of raising rates too much. She further added that higher long-term US Treasury yields could be substituted for higher rates since it should lead to lower spending and investment.
This week, Dallas Fed Bank President Lorie Logan drew less emphasis on raising interest rates further if long-term Treasury yields remain elevated.
Fed Vice Chair Philip Jefferson also warned that the central bank needs to be very careful with a further hike in interest rates.
Atlanta Federal Reserve Bank President Raphael Bostic said on Tuesday that current monetary policy is sufficiently restrictive and inflation will come down to 2% without triggering a recession.
The US Dollar Index (DXY) delivered a five-day losing spell and stabilized below 106.00 amid an improved market mood and squeezing expectations of one more interest rate increase from the Fed for the remainder of 2023.
As per the CME FedWatch Tool, traders see an 86% chance of the Fed keeping interest rates unchanged at 5.25 to 5.50%, where they’ve stood since July. The odds of one more interest rate increase in any of the two remaining monetary policy meetings in 2023 have dropped to 25%.
The US Dollar carries the potential of recovering after a corrective move as the US economy is resilient amid tight labor market conditions and robust consumer spending. The global economy is expected to face further calamity due to Israel-Palestine tensions.
Going forward, investors will focus on the inflation data for September, which will set an undertone for the Fed’s November monetary policy.
Technical Analysis: Gold price seems stabilizing above $1,870
Gold price prints a fresh weekly high above $1,870.00 as long-term Treasury yields move down from a multi-year peak. The precious metal recovers close to the 20-day Exponential Moving Average (EMA) at $1,871.00, but the market’s mood could turn volatile amid a data-packed week. The yellow metal remains broadly bearish, trading below the 200-day EMA. Momentum oscillators rebounded swiftly after turning oversold.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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