Gold prices extended gains on Thursday (August 12) after data out of the U.S. showed a slight moderation in consumer prices soothing concerns of an early tapering of economic support by the Federal Reserve for now.
Spot gold was up 0.2% to $1,754.13 per ounce by 0827 GMT, having recorded it biggest one-day percentage gain since May 6 on Wednesday. U.S. gold futures gained 0.2% to $1,756.70.
The U.S. Labor Department said its consumer price index climbed by 0.5% last month, in line with economists’ estimates and after jumping by 0.9% in June. Compared to July 2020, consumer prices were up by 5.4%, unchanged from the annual rate of growth seen in June.
“The (data) release had a clearly bullish impact on gold. The bullion market moved up, dragging silver along,” HSBC analyst James Steel told Reuters.
A dip in the dollar and bond yields provided further support to the precious metal. “Lower yields and a softer dollar are providing some reprieve or gold which has found its way back towards $1,750,” wrote Craig Erlam, Senior Market Analyst, UK & EMEA at OANDA in a research note.
Gold and the US dollar share an inverse relation, one of the most talked about in currency markets.
A weaker greenback increases the value of other countries’ currencies. This increases the demand for commodities including gold and also increases the prices. When the U.S. dollar starts to lose its value, investors look for alternative investment sources to store value. Gold is an alternative.
The yellow metal is also viewed as a hedge against higher inflation, but a US central bank rate rise would dull bullion’s appeal as that would increase the opportunity cost of holding the non-yielding precious metal while boosting the dollar.
Vivek Dhar, commodities analyst at the Commonwealth Bank of Australia, said in a note on Wednesday that it was “difficult to remain bullish on the precious metal,” given the hawkish outlook for U.S. monetary policy.
Meanwhile, Dominic Schnider, chief investment officer at UBS Global Wealth Management, told CNCB that real yields will “go less negative” and that means more downside for gold. When real yields move higher then that creates some downward pressure for gold and vice versa.
The inflation reading supported the Federal Reserve’s belief that high price pressures are “transitory” while the “transitory” inflation camp of economists/market participants/ policy makers took comfort from the retreat of items that have been chief contributors to the jump in inflation. The other camp highlights that high annual rates remain largely unchanged.
No matter how each camp sees it the reality is that the majority of Americans are feeling more pain in their wallets as prices for consumer goods continue to rise.