XAU/USD rallies after weak US economic indicators

Gold (XAU/USD) extends its rally, trading in the $2,650s on Friday, after the release the the preliminary Michigan Consumer Sentiment Index showed a slide in sentiment in October.

The Michigan Consumer Sentiment Index fell to 68.9 in October from 70.1 in the previous month and was below estimates of 70.8, according to data from the University of Michigan.

The release came after data showed US “factory-gate” prices rose in September compared to a year ago but flat-lined compared to the previous month. The mixed data seemed to have little impact on Gold prices which continued trading in the $2,640s after the release.

The US headline PPI increased by 1.8% YoY in September, which was higher than the 1.7% registered in August, and beat estimates of 1.6%, data from the US Bureau of Labor Statistics (BLS) showed on Friday.

These gains, however, were not reflected in the monthly data which showed headline PPI rising 0.0% compared to 0.2% in August and below the 0.1% forecast.

The PPI ex Food and Energy rose by 2.8% YoY in September, which was higher than the 2.4% in August and beat expectations of 2.7%. For core PPI the monthly data showed a slower 0.2% in September compared to 0.3% in August which was in line with expectations.

PPI figures are sometimes taken as a precursor of consumer prices since higher production prices are usually passed to consumers in the form of dearer shop prices.

Gold rallies after US jobs data

Gold rebounded from just above the key $2,600 psychological level on Thursday after the release of official US Jobless Claims data showed a surprising spike in the number of people claiming unemployment benefits. US Treasury yields dipped after the release, the US Dollar (USD) marginally weakened and Gold got a lift.

US Initial Jobless Claims in the week ending October 4 rose by 258K, above the 225K of the previous week and expectations of 230K, data from the US Bureau of Labor Statistics (BLS) showed. The rise in initial claims was well above the average, although this might have been caused by the exodus from Florida ahead of the impact of Hurricane Milton, according to Bloomberg News.

Continuing Claims for the week ending September 27 rose to 1.861 million, higher than the revised-down 1.819M of the previous week and roundly above the 1.830M estimate.

Overall, the data showed weakness creeping into the jobs market, which is likely to keep the Fed on track to cut interest rates (in order to stimulate borrowing and job creation) at its November policy meeting. In August, Fed Chairman Jerome Powell signaled he was shifting his focus from inflation to the Fed’s other mandate: “full employment”.

Although the market-based probability of the Fed lowering its fed funds rate by 50 basis points (bps) (0.50%) remained at zero after the release, the chances of a smaller 25 bps (0.25%) cut rose to 89% from 85% before the jobs’ data, according to the CME Fedwatch tool. The probability of the Fed leaving its key interest rate unchanged in November fell to 11% from 15%. These probabilities have since reverted to 85% for 25 bps and 15% for no-change.

Higher-than-expected inflation data, as measured by the Consumer Price Index (CPI) for September, released at the same time as the Jobless Claims’ data, failed to act as a counter-weight. Headline CPI climbed 2.4% year-over-year (YoY) from 2.3% previously, and core CPI rose 3.3% YoY from 3.2% previously. The higher inflation would normally be expected to increase bets of the Fed keeping interest rates unchanged to continue the fight against stubbornly high inflation, however, this was not the case on Thursday. This was probably due to the Fed’s new prioritization of employment.

Gold has recently gained a further backdraught from the speeches of Fed policymakers. A long list of officials commented on the outlook for monetary policy on Wednesday, and all were assessed as either neutral or dovish.

Gold’s Resurgence: A Deep Dive into Market Dynamics

Gold prices have been experiencing a resurgence, driven by a confluence of economic factors and market sentiment. The recent decline in the Michigan Consumer Sentiment Index, a leading indicator of consumer confidence, has played a significant role in bolstering gold’s appeal as a safe-haven asset. As consumers become more cautious about spending, they tend to shift their investments toward assets perceived as less risky, such as gold.

The inflationary landscape has also contributed to gold’s upward trajectory. While producer prices have been on the rise, consumer prices have remained relatively stable. This mixed inflationary picture, coupled with the potential for further economic slowdown, has created an environment that favors gold. Investors often view gold as a hedge against inflation, as its value tends to appreciate when prices are rising.

The Federal Reserve’s monetary policy stance has also had a substantial impact on gold prices. With the recent decline in jobless claims, expectations for interest rate cuts have intensified. Lower interest rates typically make gold more attractive to investors as the opportunity cost of holding non-interest-bearing assets decreases.

Technical analysis of gold prices provides further insights into the market’s dynamics. A break above the recent high could signal a continuation of the upward trend. However, there is also a possibility of a pullback to the lower end of the trading range.

In conclusion, gold’s resurgence is a result of a complex interplay of economic factors and market sentiment. The decline in consumer confidence, mixed inflationary pressures, and expectations for lower interest rates have all contributed to the metal’s appeal. As investors continue to evaluate the economic outlook, gold’s performance will likely remain closely watched.