Fundamental Analysis

Gold (GC) Futures Prices Approach a 10-week High as US Inflation Cools Off

  • Gold prices soared following a sharp drop in US inflation.
  • China’s senior authorities advocated for more focused restrictions amid a rise in COVID-19.
  • The odds of a fifth straight 75bps Fed rate hike have fallen below 15%.

A massive rally in Gold (GC) futures prices occurred following a sharp drop in US inflation data on Thursday. The precious metal increased by around 3% from its closing price on Wednesday and might hit a 10-week high soon. This move was, however, capped on Friday due to anxiety over the resurgence of COVID-19 in China.

For the first time since April, China’s daily Covid infections exceeded 10,000, with Beijing’s cases reaching their highest level in more than a year. The nation’s senior authorities advocated more focused restrictions to suppress the virus.

In the meantime, the US dollar index plummeted to 107.80 as the probability of a less hawkish statement from Federal Reserve policymakers at the December monetary policy meeting increased. According to the CME FedWatch tool, the odds of a fifth straight 75 basis point (bps) rate hike have fallen below 15%, causing a hemorrhage in the 10-year US Treasury yields, which have now fallen to 3.8%.

This significantly increased bullion prices, which had previously been negatively impacted by rising interest rates that increased the opportunity cost of keeping non-yielding assets this year

US inflation (Source: Bureau of Labor Statistics)
US inflation (Source: Bureau of Labor Statistics)

In contrast to estimates for a rise of 7.9%, the October consumer price index report for the United States came in up 7.7% year on year. This is a significant drop from the 8.2% increase observed in the September survey. This report might contain the most significant data for the month, if not the entire quarter. The Federal Reserve’s December FOMC meeting may be influenced by the somewhat lower reading of the CPI report. According to The Wall Street Journal, the Fed is expected to boost its Fed funds rate by 0.5% in December.

However, despite October’s hints of falling US inflation, price pressures were still much higher than the Fed’s 2% target. This means the bank will continue to raise interest rates, albeit more slowly.

Recently, Fed Chair Jerome Powell warned that interest rates may rise higher than anticipated and that the Fed is prepared to incur some economic losses in its fight against inflation. This implies that most assets will continue to feel the pressure of rising rates.