CPI causes drop in dollar taking gold higher

Inflation vis-à-vis the CPI (Consumer Price Index) came in unchanged when compared to the previous month. This provides the Federal Reserve with more data that could slow the oncoming of further rate hikes. The CPI increased 3.2% year-over-year; however, the inflation report came in under expectations of Wall Street projections.

The core CPI (excludes food and energy prices) rose only 0.2% which was also well under projections and expectations by analysts polled which were anticipating a rise of 0.3%. This is the smallest increase in this inflation index since September 2021. One of the main factors was a decline of 2.5% in energy prices. However, the cost of food did increase by 0.3%. According to the CME’s FedWatch tool, the probability of a rate hike pause at the December FOMC meeting has moved substantially higher up to 99.8%, this number has increased from a likelihood of 69.6% one month ago, and 85.5% yesterday.

Gold prices exhibited strong gains today with the most active December futures contract gaining $16.50 which is a percentage gain of 0.85%. The real story behind gains in gold comes out of dollar weakness, rather than traders bidding the precious metal higher. The dollar dropped substantially, losing 1.51% taking the index to 103.90. The last time the dollar traded at this low level was September 1 which occurred during a pronounced rally that began at 99.225 and concluded above 106. When you factor in gold’s strong gain today of 0.85% it is just less than half of the decline witnessed in the dollar. Truly today’s gains in gold were the direct result of dollar weakness which was able to overcome moderate selling pressure in the precious yellow metal.

This can be best illustrated when looking at spot gold pricing. According to the Kitco gold index physical gold is currently fixed at $1962.20 after factoring in a daily gain of $16.40. However, on closer inspection, dollar weakness added $29.80 with active selling taking away $13.40 of that increase. The selling pressure in gold today (price change minus the effect of dollar weakness) likely can be attributed to traders taking profits on recent short positions.

The war in Ukraine continues to rage as attacks by both Russia and Ukraine have escalated. The war in Israel is also escalating, with the IDF continuing their campaign to reduce the ability of their enemies to continue to wage attacks. However, a new factor has entered this global conflict, attacks on American military bases by proxies of Iran in both Iraq and Syria as well as retaliatory strikes by America. While we are not witnessing a global war, the conflict which has been isolated to inside Israel’s borders has now spread to regions and countries close by.

This makes today’s selling of gold seem counterintuitive considering the escalation of geopolitical conflicts in the Middle East, which now includes the United States. If dollar weakness continues and traders begin to actively buy rather than sell gold, we could see a rather strong rally develop.

Wishing you as always good trading,