Gold Prices Rally Amid Economic Slowdown and Inflation Decline

Gold prices surged to their highest levels since June 7, with the August futures contract settling at $2,372.60, up $28.40. This rally, which began overseas and continued into New York trading, occurred despite minor gains in the dollar and rising yields.

The precious metal has been on an upward trajectory, recouping most of the $84 loss experienced following the strong jobs report on June 7. This steady ascent is largely attributed to a series of economic indicators pointing towards a contracting economy and diminishing inflation.

Two key reports released today further bolstered gold's position:

1. US jobless claims declined to 238,000 last week, down from 243,000 the previous week.
2. Housing starts fell to a seasonally adjusted 1.28 million in May, below the April figure of 1.36 million and falling short of estimates.

These reports, coupled with recent data showing moderating labor market conditions, easing price pressures, and softening retail sales, suggest tepid second-quarter GDP growth. This aligns with the Federal Reserve's goal of seeing consistent evidence of declining inflation.

Chicago Federal Reserve Bank President Austan Goolsbee recently described the latest consumer price inflation reading as "excellent," expressing optimism for further cooling this year. While the Fed maintains that no single data point is definitive, the cumulative evidence is building a case for potential rate cuts.

Market sentiment is shifting, with participants increasingly betting on a rate cut as early as September. The CME's FedWatch tool indicates:

• 35.9% probability of unchanged rates
• 57.9% probability of a 25-basis-point cut
• 6.2% chance of the Fed funds rate falling between 4.75% and 5% after the September FOMC meeting

As the impact of the Fed's monetary tightening continues to affect economic activity, each new data point released strengthens the case for a policy pivot. Inflation is showing signs of abating after a prolonged period of stubbornly high readings, potentially paving the way for the Federal Reserve to cut rates sooner than initially anticipated.

This economic landscape, characterized by slowing growth and declining inflation, has created a favorable environment for gold, resulting in two new record price highs recently. 

Editor's note: Today’s members page also includes an interview with David Linn of the David Linn report recorded on June 19, 2024, at 6 PM ET.

Wishing you as always, good trading,