Gold Reaches a 5-Week High as U.S. Inflation Eases

The U.S. inflation rate is dropping, as predicted. The next question is where will gold go.

The Dollar Index, which measures the dollar to six major currencies led by the euro, reached a monthly low of 104.51 on Wednesday.

The gold futures contract for December on the New York Comex finished at $1,813.70, a $1.40 rise. Earlier, it hit $1,824.60, after rising 1% during the previous two sessions.

At 2:50 p.m. ET (18:50 GMT), the spot price of bullion, which some traders watch more closely than futures, was $1,790.58, down $3.91, or 0.2%. The peak of the day was $1,807,95.

The dollar declined on the Labor Department's announcement that the Consumer Price Index rose 8.5% year-over-year in July, compared to the highest annual increase in 41 years (9.1% in June).

Media surveys of experts in the United States predicted an annual CPI increase of 8.7% for last month. In July, the indicator showed no growth, compared to a 1.3% increase in June.

Money market traders immediately priced in the possibility of a 50-basis-point, or half-percentage-point, hike at the Federal Reserve's next rate review meeting on September 21. Prior to this, a 75-basis-point, or three-quarter percentage point, increase was strongly anticipated.

Ed Moya, an analyst at the online trading platform OANDA, remarked, "This was a favorable inflation data, since every indicator came in below the consensus forecast." Traders began setting their portfolios for a September Fed reversal when the CPI data came in cooler than expected.

Moya stated, "it is not a certain conclusion that the Fed will be much less aggressive with interest rate rises." However, stock traders may remain fairly aggressive in this situation. "Gold's path to the upside still exists, but it might take much longer if stocks remain optimistic for an extended period of time."

In the past, gold bulls would run for shelter at the slightest mention of a rate rise. Gold has been able to survive such anxieties in recent weeks, even after last week's amazing U.S. non-farm payrolls data for July, which showed more than double the pace of job growth projected by experts. Typically, a report of this significance would urge the Fed to be more proactive with rate hikes.

Thursday will also see the publication of the July producer price index and weekly data on new jobless claims, while Friday will see the release of the University of Michigan consumer sentiment index.

Bullion advocates would assert that inflation protection is an inherent part of the daily flows into futures, exchange-traded funds, and other investment vehicles used to access the metal. Those who assert differently are uneducated, they would add. Gold has never fully escaped its link with inflation.

Gold's performance over the previous two years has not been commensurate with its status as the ultimate safe haven.

Since gold reached record highs above $2,100 in August 2020, investors have been more frequently disappointed than elated. The dollar dropped below $1,600 on July 14 for the first time since August 2021 after the June CPI report indicated annual inflation at a new four-decade high of 9.1%.