Analyzing Market Response: Gold’s Stability in Light of Fed Pause Expectations Post U.S. Inflation Data

The U.S. Labor Department released July’s Consumer Price Index a little over a week ago, revealing data supporting no further need for interest rate hikes from the Fed. Immediately after this release, spot gold increased by 0.3%, and gold futures edged up from $1,968.80 per ounce to $1,976.10 per ounce.

According to the data, the Consumer Price Index increased by 0.2% in July, matching the same rate as June’s figure. In the last year leading up to July, consumer spending, according to the CPI, elevated by 3.2%. In June, the annual figure sat at 3%.

July’s year-on gain depicts the lowest level since March 2021. While consumer spending may still be on the rise, July’s Core CPI came 0.1% below market predictions.

The Consumer Price Index is gradually decreasing. Right now, consumers may not be able to see a momentous drop in gas prices or grocery store expenses, though when looking at the trend over time, the difference is significant.

In July 2022, grocery prices increased by 13.1%, and gas prices spiked by 44% compared to rates during July 2021. This year, prices for food only rose by 3.6% compared to this time last year, and gas prices actually decreased by 20%. While commodities like gas and groceries may be up on a monthly basis, the annual trends show major improvements.

“With CPI continuing to slowly tick lower, that portends less likelihood of the Fed’s need to continue to raise interest rates, particularly at the September meeting,” David Meger, the director of metals trading at High Ridge Futures, explained.

“As a result, we’ve seen the dollar retrace, and yields pull back, and that’s a better underlying environment for the gold market,” Meger continued.

The CME’s FedWatch Tool, which charts market expectations over Fed actions, increased the probability of the Fed keeping current interest rates following the release of this latest set of data. Now, the odds of the Federal Reserve maintaining the current rate sits at 90.5%, a four percentage point increase from the previous 86.5% likelihood.

With this new data, the U.S. dollar dropped again, losing value against its currency rivals. With the U.S. dollar drop, gold gained more attention from other currency holders.

Gold prices react sensitively to rising interest rates, as the rates can increase the opportunity costs of holding such non-yielding assets. With this new data supporting the idea of an interest rate pause, gold can gain more support from investors.

“Overall, there’s nothing here to suggest the Fed needs to push ahead with further interest rate hikes this year,” Paul Ashworth, the chief North American economist at Capital Economics, chimed in.

Kurt Rankin, PNC senior economist, agrees with this sentiment. “The July 2023 report’s core CPI result should reinforce the view that the Fed can begin to rely more heavily on hawkish rhetoric than on further interest rate hikes,” Rankin explained.

The Core CPI figure, which tracks inflation, came to 4.7% for July’s annual figure. In June, the year-on-gain figure was 4.8%. Based on this data, we can conclude that inflation is cooling.

“Annual inflation has fallen by around two-thirds since last summer, and inflation outside of food and energy has fallen to its lowest level in any three-month period since September 2021,” President Biden explained while stating that the U.S. economy “remains strong.”

Dropping inflation levels also support a rate pause in September. While inflation rates are still below the Fed’s 2% target, most expect the previous aggressive Fed actions to continue doing the heavy lifting, meaning no further hikes should be necessary.

The U.S. Labor Department released an additional report recently showing an increase in state unemployment benefit claims. The figure increased by 21,000 to 248,000 for the week of August 5.

With all of this new data, gold isn’t the only precious metal reaping the rewards. Silver increased by 0.2% to $22.72 per ounce, platinum gained an impressive 2.2% to $908.21 per ounce, and palladium skyrocketed by 4.5% to $1,290.94 per ounce.

As gold and other precious metals make their climbs back toward critical levels awaiting the next Fed meeting, many investors are choosing to jump now while prices are low. The weeks leading up to July’s Federal Reserve gathering showed gold making some of its largest gains this year. September’s meeting could result in the same performance rates, especially considering the latest CPI data.

As always, investors should consult their financial advisors before making any portfolio decisions.

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