Gold futures edged up last week following a largely one-sided trading. The market movement was led by contrasting reactions to increasing Treasury rates and weakening of US dollar, which evidences position-squaring in anticipation of the US Federal Reserve's strategy statements this week.
The US Consumer Price Index (CPI) data on Friday was one factor. The inflation figures reached a 40-year record, but investors were searching for more solid proof to sway the Fed's aggressive stance.
February Comex gold futures closed at $1784.80, up $0.90 or +0.05% on the previous week. The US Oil Fund ETF (USO) closed at $52.01, up $0.99 or 1.94%.
In November, inflation rose 6.8%, higher than predicted, reaching the highest level since 1982
Gold futures climbed on Friday, taking the metal to a new peak for the week. The market was lifted by higher-than-anticipated U.S. consumer prices, which also chilled some bets on rapid interest rate rises because the inflation increase was not as substantial as projected.
According to Labor Department figures, inflation climbed at its quickest rate since 1982 in November, boosting the stakes for the Fed and posing a challenge to the improving economy.
The consumer price index, which represents the value of a diversified basket of products and services, increased 0.8% for the month, representing a 6.8% year-over-year increase and the quickest rate since June 1982.
Ignoring food and energy costs, core CPI was up 0.5% for the month and 4.9% year on year, the highest increase since mid-1991. The Dow Jones forecasted a 6.7% yearly increase in headline CPI and a 4.9% increase in core CPI.
Treasury yields rise as investors keep an eye on the new coronavirus strain
Treasury rates in the United States surged early this week, making gold less appealing to invest, as risk aversion intensified with investors focused on the new Omicron type and the Fed's possible policy tightening.
After more hawkish statements from authorities, market expectation levels have risen for the Fed to focus on combating inflation. At the same time , the Omicron form expanded, according to healthcare experts, with no clear sign of its possible economic influence at this time.
Ahead of the Fed's fiscal policy announcement on Wednesday, investors are anticipating a hawkish stance from the central bank officials, which might limit the price of gold. Lower stimulus and higher interest rates tend to raise government bond yields, boosting the opportunity cost of interest-free bullion.
Although this all appears to be good on paper, gold traders have been aware of the hawkish stance since Fed Chairman Powell's speech in front of Congress two weeks ago. Powell favored a speedier taper and made a significant turn when he stated that the biggest worry with a different coronavirus outbreak or a new strain was inflation, which could leave people out of jobs and increase supply bottlenecks.
With Powell's position probably being reflected in the price of the gold market, traders must pay attention to more than just the acceleration of rate cuts. It is important for them to know when the Fed will stop tapering and begin raising interest rates. This announcement will be the catalyst for the next large shift in gold prices.
Gold prices might fall sharply if the Fed makes any statements in support of an earlier rate hike, possibly in April. A clue could come from statements suggesting that the Fed intends to finish tapering before the end of the first quarter.
Moreover, bearish investors should be on the lookout for any wording indicating that the Fed will move into a "live" mode in the near future. This will give it an opportunity to boost rates multiple times in 2022.
For gold to be bullish, the Fed will only need to hint at more rapid rate cuts without providing any details. Also, any signals that Omicron might impede the Fed's possible tightening initiatives have potential to be bullish.
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