Gold unable to eclipse $2,200 amid high inflation, USD rally

Data current as of 3/12/2024

Key points

• Gold prices recently hit all-time highs: (0:37)
• High inflation sends gold lower: (1:30)
• CPI inflation rate higher than expected: (2:43)
• USD bounces back on high inflation: (4:17)
• Gold and USD negatively correlated: (4:53)

Gold prices recently hit all-time highs

In the last week of trading, gold prices ventured into uncharted territory, breaking through the $2,100 mark—a level previously recognized as the all-time high for the precious metal. This milestone underscores gold's enduring appeal as a safe-haven asset, especially in times of economic uncertainty. Its price movement is closely watched by traders, as it often reflects broader market sentiment and can signal shifts in investor confidence across asset classes.

High inflation sends gold lower

Despite reaching historical highs, gold prices recoiled, shedding over $20 from their peak following a Consumer Price Index (CPI) inflation reading that came in higher than anticipated. This reaction illustrates the complex relationship between inflation and gold prices; while gold is traditionally seen as a hedge against inflation, this inflation report may encourage the Fed to hold interest rates higher instead of cutting as scheduled. Demand for gold tends to weaken with higher interest rates, as gold is a non-interest-bearing asset.

CPI inflation rate higher than expected

The CPI reported a 0.1% increase beyond the expected rate for February, with headline inflation at 3.2% and core inflation—stripped of volatile food and energy prices—at 3.8%. These figures exceeded forecasts, stoking concerns about persistent inflationary pressures in the economy. Such data are critical for traders, as inflation levels can directly influence central bank policies, including interest rate decisions that impact currency values and asset prices.

USD bounces back on high inflation

Following the CPI release, the US dollar saw appreciable gains against most major currency pairs, particularly the Japanese yen (JPY) and the British pound (GBP). The dollar's strength in the wake of inflation news highlights the market's reaction to shifting interest rate expectations. If inflation persists, the Fed may keep interest rates higher for longer - bolstering the appeal to hold US dollars.

Gold and USD negatively correlated

Historically, gold and the US dollar exhibit a negative correlation, moving in opposite directions; however, both have experienced relatively high levels concurrently. This anomaly points to the multifaceted factors influencing markets—ranging from geopolitical tensions to monetary policy adjustments. Recent trends have impacted the magnitude of the correlation between gold and USD, now less than -0.20. For traders, understanding this dynamic is crucial, as their negative correlation should not be treated as a predictor of future outcomes.

Gold - USD historical correlation

Gold - USD correlation calculated using gold futures (/GC) and a US dollar index ETF (UUP)

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