Gold Price (XAU/USD) Maintains Gains Despite Higher-than-Expected Producer Price Index (PPI) Figures for September.
The key monthly Producer Price Index rose at a higher rate of 0.5% compared to the expected 0.4%, and the core Producer Price Index expanded at a faster pace of 0.3% compared to the expectations and the previous reading of 0.2%.
On an annual basis, the core Producer Price Index increased to 2.2%, exceeding expectations of 1.6% and the previous reading of 2%. Prices of basic goods and services also surged to 2.7%, indicating the strength of the U.S. economy and the possibility of renewed inflation, supporting the Federal Reserve’s monetary tightening and the dollar’s interest.
However, gold continued to rise during Wednesday’s trading, as Federal officials continue to favor keeping interest rates steady in the 5.25% to 5.50% range until the end of the year.
Gold also benefits from the escalating conflict in Palestine, which may extend beyond Gaza. Investors should be prepared for fluctuations in the price of gold in the near and distant future, as the minutes of the September Federal Open Market Committee (FOMC) meeting and inflation data for the same month are set to be released.
It’s worth noting that Federal officials support maintaining interest rates unchanged due to the rise in U.S. Treasury bond yields to multi-year highs. FOMC members expect higher bond yields to be offset by further interest rate hikes, which may slow down spending and investment due to rising borrowing costs.
Gold prices seem to be rising near their weekly high of $1870 despite the significantly unexpected Producer Price Index report. This may raise the likelihood of an interest rate hike in the November Federal Reserve policy meeting. I expect gold prices to remain volatile as the FOMC meeting minutes are released today, with markets monitoring inflation expectations and interest rates.
Regarding U.S. producer inflation, the key monthly Producer Price Index is expected to expand at a slower rate of 0.4% compared to the 0.7% recorded in August, while the core Producer Price Index is expected to rise at a steady rate of 0.2% in the same period. On an annual basis, the core Producer Price Index is expected to remain stable at 1.6%.
However, I believe that gold prices may remain high for some time amid the conflict in Palestine. The appeal of gold as a haven remains high amid risk aversion, increasing demand for safe-haven assets. In addition to the high demand for safe-haven assets, the Fed officials’ neutral interest rate statements may keep gold on an upward trajectory.
The U.S. Dollar Index (DXY) has seen a five-day losing streak and has settled below 106.00 points amid improved market sentiment and expectations of further interest rate hikes by the Federal Reserve for the remainder of 2023. Meanwhile, the U.S. dollar is poised for a potential recovery after a deep correction, with data showing the U.S. economy’s resilience amid current labor market conditions and strong consumer spending.
I expect the global economy to face more crises and disasters due to tensions in Palestine. Investors will also focus on inflation data for September, which will determine the basis of the Federal Reserve’s monetary policy for November.