Gold Rallies, Fed 'Hawkish' Ahead of Stagflation Data

GOLD PRICES rallied from yesterday's drop on Tuesday after US Federal Reserve officials indicated they will hold interest rates higher for longer in 2024 while analysts saw stagflation back in focus ahead of key US inflation data due this week, writes Atsuko Whitehouse at BullionVault.

The spot gold price fell 1.4% on Monday from Friday’s 3pm benchmark auction in London to hit $2332 per ounce before rallying back $15 after rising 3.4% last week to gold's highest weekly close in three.

“US CPI data this week could be a potential catalyst,” said an economist to Reuters, in order to break the range in (interest) rates and views on risky assets.

“Even though US data has started to show some signs of moderating, inflation remains sticky, creating fears of stagflation.”

The Bureau of Labor Statistics will release its latest US consumer price index (CPI) data on Wednesday, which is expected to show that the headline inflation has fallen to 3.4% in April from year ago, compared with 3.5% in March. The CPI was 0.3 percentage points higher than in February.

“While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse,” said Federal Reserve Governor Michelle Bowman, a permanent voting member of the rate-setting Federal Open Market Committee, last Friday.

“Reducing our policy rate too soon or too quickly could result in a rebound in inflation, requiring further future policy rate increases to return inflation to 2 percent over the longer run,” Bowman said in a speech to a group of Fed Watchers in New York.

“It’s just too early to think about cutting rates, given disappointing inflation data so far this year,” echoed Dallas Fed President Lorie Logan, who will not be a voting member of the rate-setting committee until 2026, at the Louisiana Bankers Association annual Conference on Friday.

US consumer sentiment fell to a six-month low in May, according to data reported by the University of Michigan last Friday, while the survey's reading of one-year inflation expectations rose to 3.5% in May from 3.2% in April.

US gross domestic product meanwhile slowed to an annual rate of 1.6% in the first quarter of 2024, decelerating from a strong 3.4% growth rate in the final three months of 2023, according to early Commerce Department estimates.

“Stagflation back in focus,” said the mining-industry’s World Gold Council in its latest gold market commentary, pointing to inflation and growth, which have seen several consecutive up-ticks in recent months.

"[Stagflation] has historically been one of the best environments for gold returns,” the WGC comment continues, pointing to its research that gold currently shows the highest annualised average adjusted return since the first quarter of 1973 among financial assets such as the S&P500, US Treasury or agency bonds, US corporate bonds, or the US Dollar Index.

"[But] I don’t see the stag, or the flation," said Federal Reserve chair Jerome Powell said last month after the US central bank made no change to its key policy interest rate.

Powell pointed out that both inflation rates and the unemployment rate are below 4%, contrasting with the 1970s, when inflation rose to a range of 5.5% to 14.4% while the jobless rate rose into a range of 4.9% to 8.2%.

European inflation data will be released on Friday. Euro area inflation surprised last month, with the headline rate dropping to just 2.4%.

In contrast to the US central bank’s rate-setting officials, Christine Lagarde, President of the European Central Bank, has hinted at June rate cuts. 

Gold priced in the UK Pound and the Euro meantime bounced Tuesday to £1870 and €2175 per ounce respectively.

Prices for silver, which finds nearly 60% of its annual demand from industrial uses, also rallied from Monday’s drop to trade at $28.43 per Troy ounce.