Gold (XAU/USD) is slightly lower on Tuesday after the release of December US inflation data confirmed that prices remain stable, indicating that further interest rate cuts by the Federal Reserve could be in the future. XAU/USD is trading at $4,590, down 0.15%, after briefly hitting a record high of $4,634 earlier in the day.
Bullion declines as U.S. inflation confirms cooling trends and geopolitical risks remain low
The dollar continues to have a negative impact on bullion prices, even though the December Consumer Price Index (CPI) was mostly in line with forecasts. According to the Bureau of Labor Statistics (BLS), headline and core inflation appear to have stabilized, with both indicators remaining unchanged from the previous month.
Other data showed that the situation on the labor market was improving, while earlier the Fed president in St. Louis Alberto Musalem adopted a neutral or hawkish tone in his speech.
According to them, money markets were pricing in an easing of monetary policy of 50 basis points at the end of the year Main Square Terminal. However, over the weekend, developments related to the Justice Department’s indictment of Fed Chairman Jerome Powell, which poses a threat to the Fed’s independence, reduced the chances of an interest rate cut at the January meeting.
We have geopolitics and more data from the US ahead of us
Threats to the Fed’s independence and emerging tensions in the Middle East, which escalate current geopolitical risks, are a tailwind for bullion prices.
US President Donald Trump announced tariffs of 25% on countries doing business with Iran, putting pressure on China and Russia, two of Iran’s trading partners.
The US economic document will include the release of the Producer Price Index (PPI) for October and November, retail sales for November and speeches by numerous Fed officials.
Daily market update: Gold falls in line with US yields
- The strength of the Polish zloty is one of the main reasons for the slight decline in the value of gold. The US Dollar Index (DXY), which tracks the dollar’s value against a basket of six currencies, rose 0.26% to 99.15. On the other hand, U.S. Treasury yields are falling, led by the 10-year T-bond, which dropped almost two basis points to 4.167%.
- The CPI index in the US in December did not change compared to November and was in line with estimates at the level of 0.3% m/m. On a yearly basis, prices increased by 2.7% as expected and remained unchanged compared to the previous month.
- Core CPI increased by 0.2% m/m, missing the forecast of 0.3% and matching the reading from the previous month. In the twelve months to December it remained unchanged from November’s level of 2.6%.
- ADP’s 4-week average employment change improved from 11,000. up to 11.75 thousand
- New home sales in October decreased by 0.1% m/m from 738,000. in September to 737 thousand The Commerce Department revealed that year-over-year sales rose 18.7% year-over-year over the same period as mortgage rates and falling prices look set to support the housing market.
Technical Analysis: Gold price remains at $4,600
Gold’s broader uptrend appears to be slowing down as buyers failed to break the $4,650 barrier, which could have put the $4,700 mark in play. The bullish momentum is fading, as illustrated by the Relative Strength Index (RSI) which has flattened slightly near the overbought area but has failed to record a higher high.
To maintain bullish continuation, gold needs to clear $4,650. Conversely, if XAU falls below $4,550, it could embolden sellers to push prices back to the intraday low of $4,500, with the $4,400 threshold becoming the next key downside target.
Gold FAQs
Gold has played a key role in human history as it has been widely used as a store of value and a medium of exchange. Nowadays, beyond its luster and operate in jewelry, the precious metal is widely viewed as a safe-haven asset, meaning it is considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and currency depreciation because it is not tied to any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies in turbulent times, central banks typically diversify their reserves and purchase gold to improve the perceived strength of the economy and currency. High gold reserves may provide a source of confidence in the country’s solvency. According to data from the World Gold Council, central banks added 1,136 tons of gold to their reserves in 2022, worth about $70 billion. This is the highest annual purchase since registration began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US dollar and US treasury bonds, which are both major reserve assets and sheltered haven assets. When the dollar depreciates, gold tends to rise, allowing investors and central banks to diversify their holdings in turbulent times. Gold is also inversely correlated with risky assets. A rally in the stock market tends to weaken the price of gold, while sell-offs in riskier markets favor the precious metal.
The price may change due to many factors. Geopolitical instability or fear of a deep recession can quickly cause gold prices to rise due to its safe-haven status. Gold, as a non-yielding asset, tends to rise at lower interest rates, while the higher cost of money tends to weigh on the yellow metal. Still, most of the movements depend on the behavior of the US dollar (USD) when the asset is priced in dollars (XAU/USD). A sturdy dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
