Gold reclaims $2,000 as poor US Retail Sales soften inflation outlook

Gold price bounces vigorously on dismal US Retail Sales data.
The US Dollar plummets as downbeat Retail Sales data soften the inflation outlook.
Investors don't see the Fed reducing interest rates before June.

Gold price (XAU/USD) delivers a strong recovery in Thursday's early New York session as the United Sales Census Bureau has reported poor Retail Sales data for January. Retail Sales are down by 0.8% against the consensus of 0.1%. In December, the economic data rose by 0.6%.

Weaker-than-anticipated Retail Sales data has softened the inflation outlook a little, having a material impact on the US Dollar as cooling expectations of aggressive rate cuts by the Federal Reserve (Fed) will continue to act as a cushion in the broader term. The US Dollar faces heavy foreign outflows as a softened inflation outlook dampens expectations of a hawkish narrative by the Fed.

The broader outlook of the Gold price is still uncertain as hopes of Federal Reserve (Fed) rate cuts have waned due to hotter-than-expected Consumer Price Index (CPI) data for January, released on Tuesday. While investors are not expecting a rate-cut move by the Fed before June following stubborn inflation data, US Treasury Secretary Janet Yellen and Chicago Federal Reserve Bank President Austan Goolsbee see the one-time bump as incapable of impacting the longer-term trend in inflation declining towards the 2% target. Austan Goolsbee warned that higher interest rates for a longer period could result in a significant blow to employment, which is one of the Fed’s dual mandates.

Daily Digest Market Movers: Gold price recovers swiftly while US Dollar Index plunges

Gold price rebounded sharply as the January US Retail Sales turned out weaker than expected.
Retail Sales contracted sharply by 0.8% against expectations of 0.1%. Retail Sales, excluding automobiles, were down by 0.6%, while investors forecasted to have grown by 0.2%. Retail Sales Control Group dropped by 0.4%.
The US Dollar Index (DXY) plunges to near 104.30 as weak Retail Sales data has softened the inflation outlook.
Retail Sales represent spending by households at retail sales. Lower spendings are generally followed by easing prices for goods and services.
The broader appeal for the Gold price is still risky as investors don’t see the Fed reducing the benchmark rate before June, as price pressures in the United States economy were surprisingly stubborn in January.
The US inflation turned out persistent despite the Fed holding interest rates unchanged in the range of 5.25-5.50% for a longer period.
Market reaction to non-yielding assets and US equities was adverse after higher-than-expected US CPI inflation was reported in January. However, US Treasury Secretary Janet Yellen advised focusing on a longer trend, indicating that inflation is decreasing decisively.
In her speech at the Detroit Economic Club on Wednesday, Janet Yellen said extensive consideration of a one-time blip in the inflation data is a tremendous mistake.
Yellen added that our focus should be on the longer-term decline in inflation, resilient economy, and rising wages, not on minor fluctuations.
Similarly, Chicago Fed Bank President Austan Goolsbee said on Wednesday that inflation is on track to the central bank’s target of 2% despite remaining slightly higher for a few months.
Austan Goolsbee added that the outlook of interest rates is tied to the Fed’s confidence in inflation declining to 2% but a longer stay with restrictive monetary policy stance could impact the employment side of the Fed’s mandate.
On the contrary, Fed Vice Chair Michael Barr showed uncertainty over achieving a ‘soft landing’ as recent inflation data indicates that the path towards price stability would be bumpy.

Technical Analysis: Gold price recaptures $2,000

Gold price recovers to near the psychological support of $2,000. The broader outlook for the precious metal is still negative as the 20 and 50-day Exponential Moving Averages (EMAs) are on the verge of delivering a bearish crossover. The 200-day EMA near $1,970 is expected to support the Gold price bulls.

After a solid recovery move, the 14-period Relative Strength Index (RSI) has rebounded above 40.00.

Gold FAQs

Why do people invest in Gold?

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Who buys the most Gold?

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

How is Gold correlated with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

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