Gold Prices Strengthen as Inflation Data Aligns with Expectations


Gold prices surged in early trading today, reaching their highest level in a month, buoyed by a weakening dollar following the release of US consumer spending data, also known as the Personal Consumption Expenditures (PCE) report.

On Thursday (29/2/2024), gold prices in the spot market closed up by 0.42% at $2043.17 per troy ounce, marking the highest level in a month since February 2, 2024. Meanwhile, as of 06:00 AM WIB on Friday (1/3/2024), gold prices in the spot market rose by 0.04% to $2044.02 per troy ounce.

The surge in gold prices on Thursday was attributed to the weakening yields of US Treasury bonds following inflation data in line with expectations. Market attention shifted to further comments from Federal Reserve officials to gauge signals of interest rate cuts.

The US Department of Commerce's Bureau of Economic Analysis reported that PCE inflation in January rose by 2.4% year-on-year (YoY) and reached 0.3% month-to-month (mtm). While the monthly figure was higher than December 2023's growth of 0.1%, the YoY figure was lower than December 2023's growth of 2.6%. These figures were in line with market expectations, which anticipated PCE inflation to grow by 0.3% (mtm) and 2.4% (YoY).

The core PCE inflation, which excludes volatile food and energy prices, also rose to 0.4%, aligning with market expectations.

The easing of PCE inflation brings hope that the Federal Reserve will soon cut interest rates. However, analysts suggest that a 0.4% PCE inflation rate for this month (January) won't bring rate cuts closer than June.

Although gold is traditionally seen as a hedge against inflation, higher interest rates to control price increases hinder investments in gold bars as they don't yield interest.

Currently, the market predicts a 62% chance of a Fed interest rate cut in June 2024, according to the CME FedWatch Tool. Federal Reserve officials earlier this week mentioned the possibility of rate cuts, likely towards the end of this year.

Stable Federal Reserve discourse indicates no rush in cutting interest rates and that the news has already been factored into the market. However, any potential changes leading to the idea of cutting interest rates slightly faster would positively impact gold.

Gold prices are highly sensitive to movements in US interest rates. An increase in US interest rates strengthens the dollar and US Treasury yields, unfavorably impacting gold as a stronger dollar makes gold harder to buy, resulting in decreased demand. Gold also doesn't offer yield, making it less attractive as US Treasury yields rise.

Conversely, lower interest rates weaken the dollar and US Treasury yields, reducing the opportunity cost of holding gold. Consequently, gold becomes more attractive to collect.

Gold prices have surged as US inflation data aligns with expectations, driving investors' attention towards potential Federal Reserve interest rate cuts. While the path of interest rates remains uncertain, gold continues to be influenced by economic indicators and monetary policy developments.

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