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Was yesterday’s drop in gold a “One and Done”?

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Yesterday, gold traders and investors aggressively took gold $25 lower and $37 lower during the intraday low. This was a knee-jerk reaction to the government’s release of the most current inflationary data, the CPI. Although economists polled by Reuters and Dow Jones predicted that February’s inflationary pressures would increase. However, even the experts underestimated the power of inflation.

Early forecasts by economists expected that the consumer price index, which includes healthcare, housing costs, energy, as well as food would rise by 3.1% in February. The numbers came in above that at 3.2% year-over-year. However, more worrisome was the forecast of the core CPI which strips out volatile items like energy and food which was expected to show an increase of 0.4% month over month well above January’s inflation numbers which showed inflation increased month over month by 0.3%.

The selloff that followed in gold seems to of been a knee-jerk reaction to the belief that February’s hot inflation would cause the Federal Reserve to change their monetary policy course with an anticipated pivot to rate cuts this year. 

Traders and investors bought the dip of yesterday’s strong price decline, and it seems that market sentiment once again favors the idea that the Federal Reserve will continue along the track, they laid out during the December FOMC meeting. This was the first time the Federal Reserve laid out a series of rate cuts beginning in 2024, and continuing these cuts to normalize interest rates through 2025 and 2026.

The CME’s FedWatch tool, which is now anticipating that there is a 65% probability that the Federal Reserve will initiate the first rate cut in June down from approximately 70% recently. This illustrates that market participants once again are optimistic about rate cuts this year.

The CME’s FedWatch tool did not show a strong decline in the probability of a rate cut. Gold recovered from yesterday's strong decline in a single day, the best explanation I can think of was that yesterday’s selloff in gold was “One and Done.”

As of 5:35 PM EDT, gold futures basis the most active April contract is currently fixed at $2179.40 after factoring in today’s net gain of $15.50 or 0.72%. Dollar weakness provided fractional tailwinds, but the dollar only declined by 0.13% meaning that the other 0.60% of gold’s 0.72% increase was a direct result of market participants bidding the precious yellow metal higher.

Wishing you as always good trading,

Gary S. Wagner - Executive Producer