Editor's Note: The article was updated to reflect higher gold prices following the U.S. CPI data.
(Kitco News) - After a slow start, the gold market has managed to attract some buying momentum as U.S. inflation pressures remain elevated but have not accelerated.
However, some analysts note that gold could face near-term headwinds as the latest inflation data could force the Federal Reserve to raise interest rates next week.
The Consumer Price Index (CPI) rose 0.4% in August, following a 0.1% increase in July, the U.S. Bureau of Labor Statistics announced Friday. The inflation data were in line with economists’ expectations.
Over the past 12 months, headline inflation rose 3.4%, in line with economists’ expectations.
Meanwhile, core CPI, which strips out volatile food and energy prices, rose 0.3% last month, up from 0.2% in July. Monthly core inflation was slightly hotter than expected, as consensus forecasts projected a 0.2% increase.
Over the past 12 months, annual core inflation rose 2.4%, down slightly from 2.5% in July and in line with consensus estimates.
After a slow start to its initial reaction to the CPI data, gold has managed to find its legs to run higher. As of 9:10, spot gold last traded at $4,381.10 an ounce, up more than 1.5% on the day.
Despite the jump, the precious metal still faces some headwinds as U.S. inflation remains well above the Federal Reserve’s 2% target. A potential rate hike would raise gold’s opportunity costs as a nonyielding asset.
But looking through any potential volatility, analysts have said that they see any dip in gold as a buying opportunity. Analysts have said that gold’s downside is limited, as the market has already priced in higher interest rates by the end of the year.
“Market expectations for the Federal Funds Rate at the end of this year, based on futures pricing, have recently moved back close to their July highs. At that time, however, the gold price was more than USD 400 per troy ounce lower than it is today. This suggests that gold is once again benefiting from its role as a safe-haven asset, which is providing additional support to prices,” said Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank, in a note Friday.
Analysts have also pointed out that, in a broader tug of war, gold remains well supported, as the U.S. government’s growing debt burden will limit how high the U.S. central bank will be able to raise interest rates.
Kyle Rodda, Senior Financial Market Analyst at Capital.com, said that although inflation remains above the Federal Reserve’s 2% target, the argument for a rate hike next week is still not cut and dried, which could create more market volatility.
“While the markets appear to be placing their proverbial bets on a hike, it's likely that members of the FOMC won't be quite as unequivocal. The doves on the committee, of which there are many, are likely to argue the case that the dip in annual core inflation justifies patience. As a result, this data will probably increase uncertainty going into the Fed decision rather than decrease it,” Rodda said.
Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, said that with no definitive answers, the Federal Reserve finds itself backed against the wall after the latest inflation data.
“There’s no guarantee that the Fed will hike next week, but it’s hard to see how the central bank can justify leaving rates on hold. What is more interesting is whether the stock market shakes off the threat of higher interest rates and continues to rally in the face of rising oil prices, higher short-term rates and even higher long-term rates,” he said.
