Gold Rallies Amid Red Sea Tensions

Gold prices briefly climbed above $2,050 earlier in the day as investors were optimistic about Fed rate cuts. However, investors seem to have ignored the United States’ high consumer inflation data while US PPI remains soft. At the time of writing, the precious metal is trading at $2047.36 per ounce.

Fed policymakers reiterate a restrictive monetary policy stance to achieve price stability. Gold price has generated significant gains as investors are confident about an interest rate cut by the Fed at its monetary policy meeting on March 20.

The probabilities of an early interest rate cut are assessed as firmer despite consumer price inflation remaining stubbornly high in December, amid a significant increase in rental prices and healthcare costs.

Soft US Producer Price Index (PPI) numbers for December and deepening Middle East tensions have strengthened near-term demand for bullions. Monthly headline PPI continues to contract by 0.1% against expectations of 0.1% growth.

The annual headline PPI accelerated at a slower pace of 1.0% while investors projected a 1.3% growth against 0.8% increase in November. The monthly core PPI remains stagnant against a 0.2% growth projection. Prices of core goods and services at factory gates were decelerated to 1.8% versus the consensus of 1.9% and the former reading of 2.0% on an annual basis.

Tensions in the Middle East have deepened as the US & UK military have launched airstrikes on Houthi targets in Yemen in retaliation for attacking merchant vessels shipping from the Red Sea. This has increased fears of widening conflicts in the Middle East as Iran could potentially enter the Israel-Hamas war in Gaza.

Fed policymakers will stick to a restrictive interest rate stance as price pressures in addition to the required rate of 2% are highly sticky due mainly to stable labor market conditions.

Cleveland Fed President Loretta Mester said March is probably too early for an interest rate cut decision as the Fed needs more evidence to be confident that inflation is progressively declining towards 2%.