- US inflation fell by 0.1%, missing forecasts of a 0.1% increase.
- Fed policymakers have gained confidence that inflation will reach the target.
- US retail sales came in higher than expected in June.
On Tuesday, gold prices reached a record high as investors gained confidence about a September Fed rate cut. The new all-time high came despite better-than-expected US retail sales figures, which boosted the dollar.
Gold traders have focused mainly on the recent US consumer inflation report and Federal Reserve policymaker remarks. Fed officials gained confidence after the US CPI report revealed the first decline in four years. Inflation fell by 0.1%, missing forecasts of a 0.1% increase. The annual figure also eased from 3.3% in May to 3.0%, lower than the forecast of 3.1%.
In the first quarter, inflation kept surprising to the upside. However, this changed in Q2, and price pressures continued a decline that started last year. As a result, Powell noted that the recent figures had increased confidence that the decline will continue to the 2% target. Other policymakers, including Mary Daly, also said there is growing confidence that the central bank’s target will be achieved.
Consequently, market participants are now pricing in a 100% chance that the Fed will lower rates in September. Lower borrowing costs mean lower Treasury yields, which increases the appeal of gold. At the same time, a weak dollar makes bullion cheaper for foreigners, increasing demand.
US retail sales (Source: Census Bureau)
The rally in gold continued despite data on Tuesday showing resilient consumer spending in the US. Economists had expected retail sales to drop by 0.3% in June. However, the actual figure was higher at 0.0%, indicating economic strength despite high interest rates. The upbeat report led to a brief rally in the dollar. However, market focus remained on the looming Fed rate cut.
Gold gained over 19% in the first half of the year for several reasons. Central bank purchases and geopolitical tensions have boosted prices. Central banks like PBoC have bought more gold this year to reduce their exposure to riskier assets. Meanwhile, the wars in Ukraine and the Middle East have supported prices with the risk of escalation. This risk has kept up with demand for yellow metal as investors sought safety.
Furthermore, the outlook for the second half of the year is bright. The Fed will likely cut rates twice, increasing demand for gold.
