Gold dropped on persistently high inflation

Gold dropped on persistently high inflation

Gold dropped early Monday amid waning expectations of an imminent Federal Reserve interest rate cut on persistently high inflation, following a higher-than-expected inflation report last week. Haven demand also lessened as U.S. Secretary of State Antony Blinken increased efforts to secure a truce in Gaza. Still, the yellow metal is sticking well above the $2300 mark.

The Fed’s favorite inflation measure – the personal consumption expenditures price indexsurpassed economists’ estimates for both the headline and core numbers – the figure excluding volatile food and energy prices. The Fed has raised interest rates by 5.25 percentage points since March 2022 in an effort to cut inflation and anticipated to be nearly ready to start cutting rates. Now, most investors aren’t expecting a rate cut until September at the earliest.

High interest rates are typically considered bearish for gold. But prices were still relatively high after setting a series of new records just two weeks ago on haven demand triggered by geopolitical tensions, including in the Middle East. Blinken’s attempts to secure a ceasefire have diminished some of that interest in the risk-off trade. 

Front-month gold futures fell 2.8% last week to settle at $2,347.20 an ounce on Comex, though the most-active June contract gained 0.2% Friday. Bullion is up 4.9% this month after rising 8.9% in March – the biggest monthly gain in more than three years – and dropping 0.6% in February. The metal rose 13% in 2023. The June contract is currently down $1.00 (-0.04%) an ounce to $2346.20 and the DG spot price is $2330.50.

Core PCE increased 2.8% in March from a year earlier, the same amount as in February, according to data released Friday by the Commerce Department. That topped the 2.7% average estimate of economists surveyed by Dow Jones. The Fed’s goal is for 2% inflation. Including food and energy, the headline number increased 2.7% on an annual basis, compared with a 2.6% estimate. On a monthly basis, both measures rose 0.3%, as expected, and the same as February.

Separately Friday, personal income data increased in line with expectations, while University of Michigan consumer spending data rose slightly higher than estimates.  

About 97.3% of the investors tracked by the CME FedWatch Tool are betting that the Fed will keep rates unchanged on Wednesday, while 2.7% expect a 25 basis point cut. More than 88% of investors also expect the Fed to hold rates at current levels in June and more than 70% in July.  The Fed kept rates unchanged at 5.25% to 5.50% at its meeting last month.

Economists will be closely watching the statements at the conclusion of the Fed’s monetary policy meeting this week for further indications on the Fed’s future moves. The key U.S. jobs report for April comes out Friday and will also be studied for signals on direction.

July silver futures decreased 5.5% last week to settle at $27.54 an ounce on Comex after the front-month contract fell 0.4% Friday. Silver is up 11% in April after gaining 8.9% in March and losing 1.2% in February. It ticked up 0.2% in 2023. The July contract is currently down $0.015 (-0.05%) an ounce to $27.520 and the DG spot price is $27.18.

Spot palladium dropped 6.3% last week to $965.00 an ounce after falling 2.7% Friday. Palladium is down 6.1% this month after advancing 7.7% in March and falling 4.6% in February. Palladium plummeted 38% last year. Currently, the DG spot price is up $7.70 an ounce to $974.00.

Spot platinum lost 1.9% last week to $920.70 an ounce, though it was unchanged Friday. Platinum is up 0.7% in April after rising 3.3% in March and decreasing 4.9% in February. Platinum dropped 6.8% in 2023. The DG spot price is currently up $24.40 an ounce to $943.50.

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