Gold prices fell after reaching near two-month highs as traders capitalised on softer US inflation reports. The US Consumer Price Index (CPI) reached multi-year lows, but a government shutdown raised concerns about the data’s reliability. Limited short-term Federal Reserve easing is anticipated, though a weaker US Dollar and geopolitical risks support bullion.
Gold’s price peaked at $4,374 after the US released weaker-than-expected inflation figures, closing the day at $4,335. US core CPI for November reached its lowest level since 2021, while the potential data distortions from a government shutdown linger.
Federal Reserve and Interest Rate Expectations
Rate cut expectations for the Federal Reserve’s January meeting remain at 24%, but a 60 basis point reduction is priced in for the full year. This keeps the US Dollar under pressure, aiding gold prices, though easing geopolitical tensions may contain gold advances with US-Russia talks resuming soon.
US CPI increased by 2.7% year-on-year in November, down from 3.0% in September, with core CPI at 2.6%. Physical gold exports from Switzerland to India fell 15% in November due to high prices, while shipments to China increased.
US Treasury yields dropped, with the 10-year rate at 4.12%, and the US Dollar Index marginally up at 98.43. Gold’s uptrend paused below $4,350, with its bullish momentum waning.
Given the pullback in gold, we see a short-term opportunity to position for consolidation or a further slight dip. The failure to break the all-time high of $4,381 suggests buyer exhaustion, so derivative traders could consider selling call options with a strike price above $4,400. This strategy allows for collecting premium while anticipating that the recent peak will act as a strong resistance level in the coming weeks.
Market Backdrop and Currency Impact
Looking back, we see that gold prices have more than doubled from the highs of around $2,100 we experienced back in 2023. This massive run-up makes the current price level sensitive to profit-taking on any news. With the price now below the technical level of $4,350, buying some short-dated put options could serve as a hedge against a sharper drop toward the $4,300 support mark.
However, we should not get too bearish, as the fundamental backdrop remains supportive for gold. The market has priced in 60 basis points of interest rate cuts for next year, a stark contrast to the aggressive hiking cycle seen in 2022 and 2023. Lower interest rates decrease the opportunity cost of holding non-yielding bullion, which should provide a floor for prices.
The weakness in the US Dollar is another key factor we are watching. The US Dollar Index is currently trading around 98.43, a significant fall from the 104-106 levels it held through much of 2023, making gold cheaper for foreign buyers. This trend is reinforced by persistent central bank demand, which has continued since their record-breaking purchases of 1,136 tonnes back in 2022.
We must treat the recent soft inflation report with caution, as the data may have been skewed by the 43-day government shutdown. The true state of inflation remains uncertain, and the upcoming Personal Consumption Expenditures (PCE) report will be critical for confirmation. Any sign that inflation is stickier than the CPI suggests could quickly reignite bets on a more cautious Fed and send gold climbing again.
