Home Forex Gold plunges amid anxiety over US inflation data

Gold plunges amid anxiety over US inflation data

by SuperiorInvest


  • The price of gold is falling sharply as investors are wary of US inflation data for January.
  • Fed policymakers could maintain their hawkish rhetoric if inflation remains stubbornly high.
  • The US dollar is recovering strongly amid dismal market sentiment.

Gold (XAU/USD) faces sharp sell-off ahead of US consumer sentiment in Monday's London session Price index (CPI) data for January. In addition, major Asian markets are closed on Monday for Chinese New Year.

The precious metal remains on edge ahead of US inflation data for January, which may weigh on the interest rate outlook. The opportunity cost of holding non-yielding assets such as gold increases if inflation remains stubbornly high, as it increases the likelihood of a hawkish stance by the Federal Reserve (Fed).

Fed policymakers have kept the case for higher interest rates longer until they have confidence that core inflation will sustainably return to the 2% target. The reason for the Fed's hawkish story is a resilient labor market and high household spending. Fed policymakers acknowledged that the drop in inflation data was encouraging, but not enough to ease its tight stance on interest rates.

Daily Digest Market Movers: Gold falls in holiday-weakened trade

  • The price of gold is falling sharply to near $2,020, despite holiday trading weakened as major Asian markets such as China, Hong Kong, Japan, South Korea and Singapore are closed.
  • The precious metal is expected to continue its sideways trend as investors await US inflation data for January to provide fresh guidance on interest rates.
  • CME's FedWatch tool shows traders see a 53% chance a 25 basis point (bps) rate cut could be announced in May.
  • As expected, monthly headline inflation is expected to rise to 0.2% in January from 0.2% in December (revised downwards from the initial estimate of 0.3%). Core inflation, which strips out volatile food and oil prices, is expected to rise 0.3% over the same period.
  • For annual data, investors expect headline inflation to have moderated significantly to 3.0% from 3.4% in December. While the core CPI slowed slightly to 3.8% from the previous figure of 3.9%.
  • Stubborn inflation data would allow Federal Reserve policymakers to make a strong case for keeping interest rates higher for an extended period.
  • For months, Fed policymakers have been stressing the need for good inflation data to ensure a sustained decline in inflation toward the 2% target.
  • Dallas Federal Reserve Bank President Lorie Logan said on Friday there was no need to rush to cut rates as she wanted to confirm resilience in a progressively declining inflation rate.
  • Meanwhile, the US Dollar Index (DXY) is making a sharp recovery from key support at 104.00 as investors are wary of US inflation data. The appeal of safe-haven assets is increasing with cautious market sentiment.

Technical Analysis: The price of gold appears to be on tension around $2,020

Gold price is at the mark or break around $2,020 as it is moving near the upward sloping boundary of the symmetrical triangle diagram the pattern plotted from the December 13 low at $1,973. While the descending boundary of the trend line of the same pattern from the December 28 high is at $2,088. The price of gold is falling slightly below the 50-day exponential moving average (EMA), which is trading around $2,023.

The 14-time Relative Strength Index (RSI) is oscillating in the range of 40.00-60.00, indicating an extended sideways trend.

Frequently asked questions about gold

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, the precious metal, apart from its luster and use for jewelry, is widely seen as a safe haven, 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 does not rely on any particular issuer or government.

Central banks are the largest holders of gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy gold to improve the perceived strength of the economy and currency. High gold reserves can be a source of confidence for a country's solvency. Central banks added 1,136 tons of gold to their reserves in 2022, worth around $70 billion, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks from 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 Treasuries, which are major reserves and safe-haven assets. When the dollar weakens, gold tends to rise, allowing investors and central banks to diversify their assets during turbulent times. Gold is also inversely correlated with risk assets. Stock market rallies tend to weaken the price of gold, while sell-offs in riskier markets tend to favor the precious metal.

The price can fluctuate due to a wide variety of factors. Geopolitical instability or fears of a deep recession can quickly escalate the price of gold due to its safe-haven status. As a lower-yielding asset, gold tends to rise with lower interest rates, while the higher cost of money typically weighs on the yellow metal. Still, most moves depend on how the US dollar (USD) behaves when the asset is priced in dollars (XAU/USD). A strong dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices up.

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