Lower-Than-Expected Inflation in the US Puts Gold Back on Track

Gold had been falling in June, but July has started positively for the gold market, and last month’s US inflation number, released this week, was lower than expected, which pushed gold up quickly. In the coming months, gold will be most affected by central bank decisions, the risk of recession and geopolitics.

In June, the gold price fell by a total of 2.2 percent to $1919.4 an ounce (£1,467.68/oz). In early July, gold has resumed its upward trend and is now trading at around 1960 dollars.

The US inflation number for June proved to be very important for gold, as it showed that consumer prices rose by 0.2 percent month-on-month and by 3 percent year-on-year. This is the lowest figure since March 2021. Markets were expecting figures of 0.3 and 3.1 percent respectively.

Inflation figures released on Wednesday are unlikely to affect the Federal Reserve’s July decision – the central bank is expected to raise interest rates by 0.25 percentage point. However, the lower-than-expected figure increases the likelihood that this will be the last step in the rate hike cycle.

The inflation figures thus also caused the dollar to fall rapidly, which in turn boosted gold. On 12 July, gold rose by $15 in just 10 minutes after the inflation figures were released. This also sent stock and bond markets quickly higher.

Gold is at a high price level ($/oz) comparing to past five years. Source: Goldprice.org

Several factors will support gold prices in the coming months

While higher inflation is good for gold in the long term, in the short term the price is more influenced by interest rates and bond yields.

With interest rate rises likely to be put on hold after the July hike and bond yields coming under pressure, this should also support gold in the coming months. August and September have also historically been the best months for gold.

What the Federal Reserve and other major central banks do will be the most important factor affecting gold prices in the coming months. July’s inflation reading was in some ways a turning point that will have a big impact on the Federal Reserve’s monetary policy debate in the second half of the year. And this is more in favour of stopping interest rate rises.

Data from the World Gold Council (WGC) and Bloomberg show that during periods when the Federal Reserve has been on hold with interest rates, gold has done rather well. Over the past 23 years, gold’s returns have averaged 0.7 per cent per month in such years.

Uncertainty persists

Uncertainty about banking, the economy and geopolitics is also having a major impact. The banking crisis in March and the aborted coup in Russia show that confidence in the future is rather hollow.

We are also seeing a number of signs pointing to a recession in the US. Examples include the inversion of the interest rate curve and the fall in the money supply (money in circulation in the economy). Such developments could change the situation significantly.

It will also be important to keep an eye on central bank purchases of gold, which last year were the largest since 1950. This is one of the reasons why gold has remained high despite interest rate hikes, rising by more than 20% since the bottom of November last year.

Several emerging countries have also taken steps to reduce the use of the dollar in international trade. There is also growing speculation that the BRICs are planning to create a currency to compete with the dollar, which could be backed by gold. All this speculation is supporting the gold price.

Silver reacted with an even bigger rise

The price of silver fell by a total of 1.8 percent in June, with a slight recovery in early July. Silver was even better affected by inflation figures, with the metal rising by as much as 3.5 percent in two hours.

Silver is also strongly supported by the market fundamentals. The physical market was in its largest deficit in several years last year and is expected to remain in a large deficit this year.

In late June, gold temporarily fell below the USD 1900 level, but bounced back quickly. This suggests that the $1900-1920 level remains a fairly strong support level with strong buying interest.

For gold, the 1945-1950 dollar level was a rather strong resistance level in the short term, and a breach of this level shows strength. Importantly, gold also broke above the 2011 peak again in July.

In the first half of the year, gold appreciated by 5.4% in dollar terms. Gold thus outperformed all other asset classes except emerging market equities. Among commodities, gold was in the top three in terms of returns, with commodities overall falling by 10 percent over the half year. This also points to the current strength of the gold market, as commodity prices often move hand in hand.

The gold market has been volatile in recent months, with a drop in June followed by a positive start to July. The release of lower-than-expected US inflation figures fuelled a rapid rise in gold prices, which was fuelled by a fall in the dollar. In the future, gold prices will be influenced by central bank decisions, the risk of a recession, and geopolitical factors. The Federal Reserve’s monetary policy, particularly following the July rate hike, will be critical. Uncertainty in banking, the economy, and geopolitics exacerbates the gold market’s dynamics. Furthermore, silver prices have remained resilient and are supported by market fundamentals. Overall, the gold market remains strong, with the potential for long-term high prices. Investors should keep a close eye on these factors in order to make informed decisions in this ever-changing market.