Gold prices dropped after reaching nearly two-month highs as traders took advantage of weaker US inflation reports. The US Consumer Price Index (CPI) is at its lowest in years, but concerns about a possible government shutdown make the data less reliable. While short-term easing from the Federal Reserve is expected to be limited, a weaker US Dollar and geopolitical tensions continue to support gold prices. Gold hit a high of $4,374 following the US’s disappointing inflation figures, closing at $4,335. The US core CPI for November is its lowest since 2021, raising concerns over potential data inaccuracies due to the government shutdown.

Federal Reserve and Interest Rate Expectations

The chance of a rate cut at the Federal Reserve’s January meeting is currently 24%, with a 60 basis point decrease factored in for the year. This puts pressure on the US Dollar, benefitting gold prices. However, easing geopolitical tensions may limit gold’s rise as US-Russia discussions are set to resume. In November, US CPI rose by 2.7% year-on-year, down from 3.0% in September, with core CPI at 2.6%. Physical gold exports from Switzerland to India dropped 15% in November due to high prices, while shipments to China increased. US Treasury yields fell, with the 10-year rate at 4.12%, and the US Dollar Index slightly up at 98.43. Gold’s upward trend paused below $4,350, and its momentum appears to be weakening. With gold’s recent pullback, there’s a short-term chance to prepare for consolidation or a slight dip. The failure to surpass the all-time high of $4,381 indicates possible buyer fatigue. Derivative traders might consider selling call options with a strike price above $4,400. This strategy collects premium while expecting recent highs to act as strong resistance in the upcoming weeks.

Market Backdrop and Currency Impact

Gold prices have more than doubled from around $2,100 in 2023. This significant increase makes current prices sensitive to profit-taking on any news. Now that prices are below $4,350, buying short-dated put options could shield against a sharp decline toward the $4,300 support level. However, we shouldn’t be overly negative, as the fundamental outlook for gold remains encouraging. The market expects 60 basis points of interest rate cuts for next year, a big change from the aggressive rate hikes of 2022 and 2023. Lower interest rates reduce the cost of holding non-yielding gold, which should support prices. The weakness in the US Dollar is another important factor. The US Dollar Index is around 98.43, down from the 104-106 range throughout much of 2023, making gold more affordable for foreign buyers. This trend is supported by ongoing demand from central banks, which continue to make significant purchases after acquiring 1,136 tonnes in record numbers back in 2022. We must approach the recent soft inflation report with caution, as the data may have been affected by the 43-day government shutdown. The true inflation situation remains unclear, and the upcoming Personal Consumption Expenditures (PCE) report will be crucial. Any indication that inflation is more persistent than the CPI shows could quickly revive expectations of a cautious Fed, leading to a surge in gold prices. Create your live VT Markets account and start trading now.

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