- Gold extended its gains as US core inflation was better than expected, causing US Treasury yields to fall.
- Traders now expect the Fed could cut rates by 40 basis points by the end of 2025, adjusting market expectations.
- Potential tariffs by the incoming Trump administration could counter disinflationary trends and impact gold's trajectory.
Gold rose for a second day in a row as US (US) yields plunged on data suggesting core inflation is slowing. This suggests that the Federal Reserve may ease policy in response to disinflationary trends. XAU/USD is trading at $2,690.
The gold metal resumed its uptrend after the US Bureau of Labor Statistics (BLS) revealed that underlying consumer inflation had declined compared to expectations and last month's readings. U.S. yields fell on the data, with the Fed now unlikely to rule out a rate cut after its December meeting.
The data led traders to expect the U.S. central bank to ease monetary policy by 40 basis points toward the end of 2025.
But gold is not out of the woods yet, with the incoming Donald Trump administration on the table with tariffs that could spur inflation and prevent the Fed from lowering borrowing costs.
If the incoming administration actually moves forward with tariffs, the U.S. dollar (USD) could rise and hurt non-yielding metals.
Meanwhile, financial markets are keeping an eye on U.S. retail sales, unemployment claims and the Fed's speech.
A daily digest that moves the markets: Plunging US real yields fuel gold's rally
- Gold extended its gains as real yields fell. As measured by the 10-year Treasury Inflation-Protected Securities (TIPS) yield, it fell 9.5 basis points (bps) from 2.33% to 2.234%.
- The US dollar index (DXY), which measures the dollar's movement against six currencies, rose 0.09% to 109.29, recovering from the day's low of 108.62.
- The consumer price index (CPI) in December rose 2.9% year-on-year, as expected, higher than the previous month's 2.7%. Core CPI for the same period rose 3.2% year-on-year, but was lower than November's 3.3%.
- Looking ahead, retail sales are expected to be 0.6% month-over-month, down from 0.7% in November. The number of new jobless claims for the week ending January 11 is expected to jump from 201,000 to 210,000.
- New York Fed President Williams said the country's high debt levels made the neutral rate quite high. He added that although inflation is receding, the Fed is waiting to see what elected officials will do on fiscal policy.
- The CME FedWatch tool shows investors are eyeing the first rate cut at the June 18th meeting.
XAU/USD technical outlook: Gold prices soar towards $2,700 as US yields fall
Gold’s uptrend is sustained, with buyers eyeing a clear break above $2,700. As the Relative Strength Index (RSI) shows, bulls are gaining momentum and heading higher, indicating momentum is in favor of higher prices. If XAU/USD rises above $2,700, the next resistance level will be at the December 12th peak at $2,726, followed by the all-time high at $2,790.
Conversely, if XAU/USD falls below $2,650, the next support would be the 50-day simple moving average (SMA) at $2,643, followed by the 100-day SMA at $2,633.
Gold FAQ
Gold has played an important role in human history as it has been widely used as a store of value and a medium of exchange. Today, apart from their brilliance and use as jewellery, precious metals are widely seen as safe assets, meaning they are considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. With the aim of supporting their currencies in times of turmoil, central banks tend to purchase gold to diversify foreign exchange reserves and improve perceptions of economic and currency strength. High gold reserves can be a source of confidence in a country's solvency. Central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase amount since records began. Central banks in emerging countries such as China, India and Türkiye are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are major reserve and safe haven assets. Gold tends to rise when the dollar falls, allowing investors and central banks to diversify their assets during times of turmoil. Gold is also inversely correlated with risk assets. Rising stock markets tend to push gold prices down, while declines in riskier markets tend to favor the precious metal.
Prices may vary depending on various factors. Geopolitical instability and fears of a deep recession can cause the price of gold to quickly rise from its safe-haven status. Gold, a non-yielding asset, tends to rise when interest rates fall, but rising costs usually put pressure on the yellow metal. Still, most moves will depend on how the US dollar (USD) behaves, as the asset is priced in dollars (XAU/USD). A strong dollar tends to suppress gold prices, while a weak dollar can push gold prices up.
