Gold Prices Plunge: The Why and What Now?

• Fall in Gold Prices as Traders Adjust Federal Reserve Interest Rate Cut Expectations
• Upcoming Consumer Price Index (CPI) Data
• US CPI Data and Its Implications
• The CME FedWatch Tool and Probability of Interest Rates
• Higher for Longer Approach Impacts Gold Prices
• Potential for Increase in Gold Prices

Fall in Gold Prices as Traders Adjust Federal Reserve Interest Rate Cut Expectations

Today's downward trend in gold prices is attributed to traders adjusting their anticipations of an immediate interest rate reduction from the Federal Reserve. Bolstered returns this month from US Treasury Yields have negatively impacted US stocks, commodities, and gold prices. The spot price for this precious metal sagged by 0.8%, dropping to $2,030.10 per ounce while futures prices also suffered a decline of 0.6%, leading to a value of $2,037.70 per ounce.

Upcoming Consumer Price Index (CPI) Data

For now, traders' attention is firmly fixed on December's forthcoming consumer price index (CPI) data, which is scheduled for release on Thursday. The question on many investors' minds is the potential for a rebound in gold prices following the disclosure of the CPI data.

US CPI Data and Its Implications

A sturdy payroll report is expected to precede the US CPI data. Given this strong payroll report, market players anticipate a rise in inflation. This potential surge in inflation may prompt the Federal Reserve to maintain or increase interest rates, without implementing cuts. The Federal Reserve has stated that persistent inflation data coupled with healthy labor markets will keep it from prematurely reducing rates.

The CME FedWatch Tool and Probability of Interest Rates

The CME FedWatch Tool shows that there is a 95.3% probability of interest rates reaching 525-550 basis points, in contrast to a mere 4.7% likelihood of rates achieving the 500-525 basis points milestone.

Higher for Longer Approach Impacts Gold Prices

It is likely that gold prices will experience further negative effects due to the Federal Reserve's higher for longer stance concerning interest rates. This particular strategy caused gold prices to struggle throughout the majority of 2023. Nevertheless, a rate cut by the Federal Reserve is still a potential later in the year. However, ING analysts have now deferred their expectations for a rate cut from March to May.

Potential for Increase in Gold Prices

Should there be an interest rate reduction later this year, this could set in motion an increase in gold prices. But it has been made clear that consideration for a rate cut will only take place if there is a decrease in inflation figures. The US inflation rate softened to 3.1% in November compared to 3.2% in October and 3.7% in September. Despite a cooling in inflation over the previous few months, the value is still above the Federal Reserve's target of 2%.

Edited by Jonathan Stoker