Gold Surges Past 2010 as Inflation Shows Signs of Slowing

On Wednesday, 12 April, the U.S. CPI data was released, showing that March’s headline inflation in the U.S. slowed more than anticipated, with the year-on-year number showing a drop from 6.0% in February to 5.0% in March; lower than the expected 5.2%. The monthly rate decreased to 0.1% from 0.4%, which was lower than the anticipated 0.2% growth.  The core price index, which measures inflation without factoring in food and energy costs, slipped to 0.4% from 0.5% monthly, in line with expectations, with the BLS attributing the rise in housing rents to offset the decline in energy prices in March.

Despite the numbers being an encouraging sign of slowing inflation, levels still remain high and way above the Fed’s ideal 2% rate. Rates are expected to continue to go up, with punters betting on a 66% chance of a quarter point hike at the next Fed meeting in May – the odds are up from last week’s 43%; when the other 57% were betting on a hike pause. 

Post-Market

Gold has been on an upward path since early march, lifted over 5% on the month by continuous headwinds beginning with the banking crisis that emerged earlier; and now from a weakening U.S. dollar in the face of softening inflation. Breaking past the $2010 mark, gold is testing the 2033 level; and is now within sight of its all-time high of $2089.

Further cuts to the benchmark interest rate by the Federal Reserves will weaken the dollar further and lend support to the safe-haven precious metal; assuming no major developments in extraneous geopolitical factors like the war in Ukraine. Said cuts, of course, will be contingent on whether inflation continues to come down in a meaningful way – Minneapolis Fed Bank President Neel Kashkari sees inflation at the middle 3% by the end of this year, closer to 2% next year; but the president of the NY Fed, John Williams, has expressed the opinion that the Fed need to do more to combat inflation.

A third possible headwind for gold will depend on a potential downside of the Fed’s tightening: whether the markets will cool too quickly and cause a crash landing of the American economy. Tightening measures, after all, are an imprecise tool whose effects tend to be visible only after a certain period. 

Investors are now advised to keep an eye out for further clues about Fed monetary policy from the FOMC Meeting Minutes, which will be released tonight, 12 April at 21:00 (GMT+3).

As a  friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.