Gold prices vaulted to their highest in eight months on Jan. 17 before settling at the $1,900 level. This followed the U.S. dollar tumbling and inflation slowing down, raising hopes of lower interest rate hikes from the Federal Reserve.
The U.S. gold futures contract reached $1,931.80, the yellow metal's highest since hitting $1,935.50 on April 25, 2022. It eventually lost traction and settled at $1,907 per ounce.
The spot price of gold followed the same path, reaching an intraday peak of $1,925.93 before settling at $1,903.80. (Related: Gold prices projected to hit $3K per ounce within a few months – analyst.)
"Gold prices softened but are still holding onto the $1,900 level,” said Ed Moya, an analyst at online trading platform OANDA. "The end of Fed tightening is approaching us, but a shallow recession might not be supportive of inflows for gold as that might lead to a stronger dollar. Gold’s rally looks like it will take a break here, but it could resume if yields continue to slide."
Meanwhile, the U.S. dollar lost ground after the Federal Reserve inflation report and was veering to its worst week in more than a month. The Dollar Index, which measures the U.S. currency against six major rivals including the euro and yen, dropped to a nine-month low of 101.265 on Jan. 18. (Related: Mike Adams interviews financial expert Peter Schiff: The falling dollar, cryptocurrencies and why gold will skyrocket.)
Of course, the gold strengthens when the dollar weakens and vice versa. The drop in the dollar and bond yields is in anticipation the Federal Reserve will lower interest rate hikes at its next policy meeting on Feb. 1.
As indicated by the Consumer Price Index (CPI), inflation rose by 6.5 percent in the 12 months to December. It has been the slowest annual advance for the CPI since October 2021, according to the U.S. Department of Labor.
"Tactically, gold and many of the markets have a hangover from yesterday’s exuberant rally on the CPI," Phillip Streible, chief market strategist at Blue Line Futures in Chicago, told Reuters.
The CPI grew at an annual rate of 9.1 percent and hit a 40-year high in June 2022, burying the Fed's inflation target of just two percent. Aiming to control the surging prices, the central bank added 425 basis points to interest rates since March via seven rate hikes. The Fed executed rate hikes of 75 basis points from June through November before imposing a 50-basis point increase in December.
Economists expect Fed to announce a modest hike on basis points
Following the release of data showing that inflation continued to ease in December, economists expect the Fed policymakers to announce a modest hike of 25 basis points on Feb. 1.
"We believe that the gold market will initially take a breather until it becomes clearer whose prediction of the future course of U.S. monetary policy is more accurate – the market's or the Fed's," Commerzbank analysts stated.
According to the Fed, U.S. industrial production fell for the second straight month in December amid lower factory output, implying that manufacturers were slowing activity based on the softening demand for goods.
This was corroborated by a Jan. 17 report of the Federal Reserve Bank of New York showing that the Empire State Manufacturing Survey posted a -32.9 percent reading in December, a steep slide from the forecast of -8.6 percent and -11.20 percent for November.
Despite the Jan. 18 price retreat, "the front-month gold contract on Comex has risen more than four percent since 2023 began, extending a similar gain from December and a seven percent rise from November."
The Comex gold benchmark could hold well at $1,900, according to Sunil Kumar Dixit, the chief technical strategist at SKCharting.com.
"In a bull trend, buyers never miss any opportunity for value buying," said Dixit. "A successful break above $1,920, followed by acceptance above $1,928, will help gold rise to $1,943 and $1,950. Our major resistance and target sits at $1,980."
A lofty, but achievable target with the way gold is performing.
Watch this video that explains how the inflation rate impacts gold prices.
This video is from the Goldretired channel on Brighteon.com.
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