Gold soars on slowing US inflation

US dollar falls on Fed rate outlook, supporting the gold price

Gold prices rose to an eight-month high this week on speculation the US Federal Reserve will further slow the pace of rate hikes after consumer prices fell for the first time in more than two years.

The spot gold price was at USD 1,905.29 an ounce at 10:30 GMT on Friday, 13 January, from 1,865,71/oz a week earlier, putting it on course for a 2.1% weekly gain. Gold futures were at USD 1,907.40/oz on Friday morning in London, a 2% weekly increase. 

A sustained move above the psychologically important USD 1,900-mark would open the way for further gold price advances, according to technical analysts. 

The latest report from the Bureau of Labor Statistics on US inflation, published 12 January, showed that consumer prices fell 0.1% in December from the previous month, after rising 0.1% in November. This was the first drop in prices since May 2020. The annual inflation rate fell to 6.5%, the lowest level since October 2021, from 7.1% in the previous month, according to the report. 

The US inflation rate has eased from a peak of 9.1% reached June, which was the highest since 1982.

Traders increased their bets for a 25-basis-point rate hike at the Fed’s 1 February meeting after the inflation data. Futures pricing now predicts a 93% probability of a quarter-point increase, according to the CME Group’s FedWatch Tool, up from a 57% chance of that move a month ago.

To combat inflation, the Fed raised rates seven times in 2022 to between 4.25% and 4.50%, from a 0% to 0.25% range at the start of the year.

The Fed slowed the pace of its rate increases to 50 basis points in December, after four, back-to-back 75-basis-point steps. The steep increases eroded the safe-haven appeal of holding gold, which pays no interest, in comparison with the US dollar and US Treasury notes. 

"In my view, hikes of 25 basis points will be appropriate going forward," Philadelphia Fed president Patrick Harker, a voting member of the rate-setting Federal Open Market Committee (FOMC), said in a speech on 12 January.  “The days of us raising them 75 basis points at a time have surely passed.”

As the inflation data made a further slowdown in the Fed’s tightening campaign more likely, the US dollar was suffering. A weaker US dollar makes gold contracts, priced in the US currency, more attractive to buy for the holders of other currencies.

The greenback was trading near a seven-month low and was on course for a weekly loss, based on the US dollar index (DXY), which tracks its value against six of its major counterparts.

The DXY was at 102.42 on Friday morning, 1.4% lower than last week’s close.

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