On Tuesday, January 14th, the price of gold briefly touched a historic high of $4,634.33 per ounce, only to rapidly retreat and settle near $4,586 by the close. This sharp rise followed by a swift pullback has led investors to question: has the gold bull market reached its peak? Concurrently, the latest US inflation data for December came in softer than expected, yet the US Dollar Index regained momentum, climbing 0.28% to 99.15. The dollar's robust rebound is increasingly exerting downward pressure on gold. Meanwhile, geopolitical uncertainties continue to boost safe-haven demand, providing additional support for the gold price. In the short term, market focus will shift to US retail sales and PPI data for further clues on the interest rate path.
The release of the US Consumer Price Index (CPI) for December, which should have been a boon for gold bulls, instead triggered a complex market reaction. The data showed a monthly CPI increase of 0.3% and an annual rate of 2.7%, while core CPI rose 0.2% monthly and 2.6% annually, all figures falling slightly below analyst expectations of 0.3% and 2.7%. This mild inflationary environment indeed strengthened bets for Federal Reserve rate cuts this year, with the market anticipating two cuts, and the CME FedWatch Tool indicating a 27.4% probability of at least a 25-basis-point cut in March, while pricing in roughly 50 basis points of cuts overall. A low-interest-rate environment typically benefits non-yielding assets like gold by reducing the opportunity cost of holding it and attracting safe-haven inflows.
However, instead of sustaining its upward trajectory after the data release, the gold price retreated from its highs, reflecting a market interpretation that is far from one-sided. Experts point out that while lower-than-expected inflation supports the case for rate cuts, it also hints at signs of an economic cooldown, leading investors to weigh whether the Fed might proceed more cautiously.
Simultaneously, the decline in US Treasury yields, though modest—with the 10-year yield dipping to 4.175% and the 30-year to 4.823%—did not fully translate into robust support for gold. The five-year and ten-year breakeven inflation rates rose to 2.368% and 2.3% respectively, signaling market expectations for controlled future inflation, which somewhat diminishes the urgency of gold as an inflation hedge. Therefore, while mild inflation has ignited hopes for rate cuts, it has also exposed gold to profit-taking pressure in the near term, with the pullback from highs potentially indicating temporary fatigue among bullish forces.
The strong rebound in the US Dollar Index has been a key driver behind gold's retreat from its peak. On Tuesday, the dollar index rose 0.3% to 99.18, extending its support from last week's strong employment data. Although the dollar briefly weakened after the inflation report, it quickly strengthened as the market interpreted the data as giving the Fed more room to balance price stability with labor market conditions, rather than necessitating immediate, aggressive rate cuts. This enhanced the dollar's appeal against other currencies, with the yen falling to 159.11 per dollar, its lowest level in over a year and a half, while the euro and pound also declined. A stronger dollar directly increases the cost of holding dollar-denominated gold for international buyers, creating headwinds that prompted the sell-off from record levels.
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