Gold Maintains One-Month High Amid Changing U.S. Inflation Trends and Speculation on Fed Actions

Gold maintained one-month highs at the end of August as U.S. inflation and job figures reinforced speculation over the Fed’s interest rate actions in September. Most analysts expect a rate pause during the next Fed gathering, and the incoming data only supports this theory. An interest rate pause would bode well for gold, hence its recent price firming.

Spot gold hit $1,940.23 per ounce last Thursday, and gold futures closed the week at $1,967.10 per ounce. Gold prices haven’t hit this level since the beginning of August immediately after the last Fed gathering. Prices are beginning to rise again as the next meeting approaches.

The personal consumer expenditures (PCE) price index, which measures inflation, increased by 0.2% in August. This rate matched June’s increase. The annual gain through July came to 3.3%, which was slightly above June’s 3.0% gain.

While inflation may still be high, consumers are spending more, which may be good news in terms of interest rate hikes. Consumer spending in the United States went up in July. The personal consumer expenditures index takes over two-thirds of the nation’s economic activity into account.

Recent data shows that consumer spending increased by 0.8% last month as shoppers returned to typical buying habits after July’s inflation data revealed a shred of hope regarding cooling rates. August showed the strongest monthly spending gain since the beginning of the year.

While the core inflation figure may still be high, it’s elevating in line with the Fed’s 2% target. Prices increased at a 0.2% monthly basis, similar to the last couple of months. Economists expected the exact inflation rates that came in for August.

“For the [Fed], the best news from this release was the relatively large decline in the price index for goods even as goods consumption remained strong,” Eugenio Alemán, the chief economist for global financial company Raymond James, explained. “On the flip side, consumption of services and the price paid for services, will remain the biggest concern for Fed policymakers.”

The current 0.2% PCE inflation rate for August remains in line with Fed expectations. “Make no mistake, the monthly sequential momentum around 0.2% is exactly what Fed policymakers are looking for to get inflation back toward the 2% target,” Gregory Daco, the chief economist with EY, chimed in.

After the Jackson Hole Symposium last week, Fed Chair Jerome Powell made it clear that the Federal Reserve is still firmly aiming for the 2% target. “Getting inflation sustainably back down to 2% is expected to require a period of below-trend economic growth as well as some softening in labor market conditions,” Powell explained.

August’s consumer spending and inflation figures were not the only big pieces of data to come in at the end of August. At the same time, weekly initial jobless claims decreased by 4,000. The total figure is now at 228,000, compared to the four-week average of 237,500.

Bob Haberkorn, a senior market strategist for RJO Futures, believes these figures are “not terrible” but also “not great,” leaving the Federal Reserve room for another rate hike early next year.

Despite this take, the current odds of an interest rate hike for September’s meeting, according to CME’s FedWatch tool, sit at just over 10%. The likelihood of the Federal Reserve keeping rates unchanged during the next gathering is at 88.5%. The bets for November’s actions are currently 50/50, as so much can change between now and then.

With that being said, gold is currently waiting for bond yields to drop so investors can turn to bullion with the reduced opportunity cost risks. With the latest economic data, the dollar index and U.S. Treasury yields temporarily fell, giving gold an opportunity to rise ahead of the upcoming Fed gathering.

The next Federal Reserve meeting will take place on September 19 and 20. While most expect the committee to hold rates, the biggest outcome in terms of gold prices will be committee sentiment regarding the rate pause.

If members discuss future rate hikes, gold will likely face more headwinds. If the committee mentions future pauses or rate cuts, gold demand may increase. Most analysts currently expect rate cuts by early to mid-2024, as it will take time for the committee to adjust its monetary policy.

Moving forward, traders can keep their eyes on the incoming data to assess how the Fed may respond. If September’s events play out the way July’s Federal Open Market Committee meeting did, gold prices may edge up before the gathering. As always, investors should consult their financial advisors for portfolio support.


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