Gold Stabilizes as US Inflation Slows

SadaNews Economy - Gold has stabilized after the monthly inflation in the United States came in lower than expected, easing some pressure on the Federal Reserve to raise interest rates.

The precious metal was at around $4,034 per ounce, after rising 1.3% in the previous session. Consumer prices in the United States fell in June for the first time in six years, pushing the bond market up as traders backed away from bets on an earlier interest rate hike this month. A key measure of core inflation showed little change, according to data from the Labor Department released on Tuesday.

The largest drop in gasoline prices since 2022 provided some relief to American consumers, as the worst effects of the energy shock resulting from the Iran War began to recede.

However, a recent escalation in fighting, coupled with a new rise in crude oil prices, threatens to prolong the inflationary repercussions of the conflict. This, in turn, increases the likelihood that central banks will keep interest rates high for a longer period, creating headwinds for non-yielding precious metals.

While Federal Reserve Chairman Kevin Warsh refrained from signaling a tighter monetary policy during three hours of testimony before Congress on Tuesday, he clarified that interest rates are among the options available to him to keep inflation within the promised target of 2%.

Warsh stated: "We have the tools needed to do that. In the coming period, I will ask my colleagues to engage in a good discussion about how much and when we need to use those tools."

Gold has seen a slight increase this month after losing 14% in the second quarter, marking its worst performance since 2013. The broader decline was driven by rising expectations that the Federal Reserve might tighten policy, alongside a stronger US dollar and rising treasury yields. Gold-backed exchange-traded funds, a primary means for investors to gain exposure to gold, have also experienced persistent net outflows in recent months.

The unexpected sharp slowdown in inflation gave the Federal Reserve more time to consider its options. Swap traders are now pricing in only a 17% chance of an interest rate hike in July, down from about 50% the day before.

Justin Lin, an analyst at Global X ETFs, remarked: "The Consumer Price Index reading will help establish the $4,000 level as a floor for gold, but Warsh's comments were quite hawkish, limiting enthusiasm about the potential for a rate cut."

Traders are pricing in a 50% chance of a US rate hike this month.

He added: "This round of Consumer Price Index data also does not account for the renewed US-Iranian strikes and the recent rise in crude oil prices, so markets may downplay this reading in favor of future signals."