Gold Hits 5-Week High on Softening U.S. Inflation 

© Reuters.

By Barani Krishnan

Investing.com -- U.S. inflation is retreating as many expected it to. The question is where will gold go from here.

Gold prices flew to five-week highs on Wednesday as the Dollar Index  which pits the greenback against six majors led by the euro, hit a one-month low of 104.51.

The benchmark gold futures contract on New York’s Comex, December, settled at $1,813.70, up $1.40. It peaked at $1,824.60 earlier, after rising a cumulative 1% over the past two sessions.

The spot price of bullion, more closely followed than futures by some traders, was at $1,790.58 by 2:50 PM ET (18:50 GMT), down $3.91, or 0.2%. The peak for the day was $1,807.95.

The dollar tumbled after the Labor Department reported that the Consumer Price Index rose by 8.5% during the year to July versus a 9.1% annual expansion in June that marked its most in 41 years. 

Economists polled by U.S. media had expected an 8.7% growth in the annual CPI reading for last month. For July itself, the index posted zero growth, versus an expansion of 1.3% in June. 

Money market traders immediately priced in a higher probability for a 50-basis point, or half percentage point, hike at the Federal Reserve’s next rate revision meeting on Sept. 21. Prior to this, bets had been heavy for a 75-basis point, or three quarter percentage point, increase.

“This was a welcomed inflation report as every metric came in below consensus estimates,” said Ed Moya, analyst at online trading platform OANDA. “Cooler-than-expected CPI data boosted gold as traders began positioning their portfolios for a Fed pivot in September.”

“It is not a foregone conclusion that the Fed will be much less aggressive with hiking interest rates, but stock traders may remain a bit aggressive here,” Moya added. “Gold’s path higher is still there, but it might take a little while longer if equities remain bid for a while.”

While the mere threat of rate hikes once sent gold bulls scurrying for cover, recent weeks have shown the yellow metal holding its own against such worries, even after last week’s epic U.S. non-farm payrolls for July that showed a job creation more than twice the level forecast by economists. Such a blockbuster jobs report would typically embolden the Fed to be more aggressive with rate hikes.

Aside from the CPI, the producer price index figures for July will be released on Thursday, along with the weekly report on initial jobless claims, while the University of Michigan consumer sentiment index will be published on Friday.

Bullion’s aficionados will argue that hedging against inflation is an inherent part of the daily flows into the futures, exchange-traded funds and other vehicles used by investors to access the metal. Gold, they’ll add, has never really diverged from its relationship with inflation; their argument is that only those who don’t understand it will utter the contrary.

 Unfortunately though, gold’s behavior over the past two years hasn’t really lived up to its billing as the ultimate safe-haven. 

 Since hitting record highs above $2,100 in August 2020, gold has often disappointed its backers more than it has delighted them. Case in point: its descent into $1,600 territory on July 14 — the first time since August 2021 — after the June CPI report showed annual inflation at a new four-decade high of 9.1%.