Gold rises after US inflation data

The price of gold (GC=F) climbed 1.06% to $2,040.40 on Wednesday (13:50 GMT) as investors weighed up fresh inflation data from the US that showed a smaller-than expected rise in prices for March.

The Consumer Price Index (CPI), a measure of the costs for goods and services, rose 0.1% for the month. The general expectation was that the CPI would have increased by 0.2% in March.

Gold bulls believe momentum will continue to build for the bullion whilst slowdown fears and stability within the banking sector remain.

Why are investors turning to gold?

Doug Turner at Kinesis Money said investors are flocking to gold for a number of reasons, with inflation and dollar devaluation the most significant economic factors seeing money move into gold in recent weeks.

“Bullion is holding strongly above $2,000, while its all-time-high at $2,075 does not seem far. Indeed, investors' interest in gold has strongly increased in the last few weeks. Overall, there are still some concerns about the banking sector stability, particularly after the default of Silicon Valley Bank and the turmoil of Credit Suisse.”

As a result, he said gold has once again proven its key role of “safe haven” and being a reliable hedge against inflation and economic uncertainty.

“Gold has offered better protection in times of risk – such as a stock market crash, recession or black swan event – over cash and other assets in recorded economic history,” he added.

Read more: Bank stocks to watch ahead of earnings reports

Impact of Fed rate decision on gold?

Turner also noted how the change of expectation for the next Federal Reserve's decision on rates has pushed up the price of gold.

“The US Central Bank was expected to continue to raise rates up to 5.75-6.00% in the next few months. The scenario has now changed, also after today’s CPI data, which are confirming that price pressure is progressively slowing down.”

According to the CME FedWatch Tool, around 65% of investors are expecting a final 0.25% rate hike in the next meeting.

“This should be the peak of the rates, meaning the end of the tightening process,” Turner added.

He further noted that after this, interest rates are expected to decrease to 4.5% by the end of 2023 and to 3-3,5% in the second half of 2024.

“All this could represent the perfect set-up for a positive environment for gold.”

Read more: US, FTSE 100 and European markets rise as investors digest inflation data

What else is behind gold’s gains?

Piero Cingari, an independent macro analyst, said much of gold's recent gains have been driven by lowering US real rates and a weakening of the US dollar, as investors began pricing in Federal Reserve rate cuts as early as this summer.

“Metals are also benefiting from China's reopening from Covid and boosting credit support to its economy.

“However, on a historical basis, gold is trading at expensive valuations compared to where US 10-year real yields are today, which should warn investors chasing short-term gains,” Cingari said.

How high could gold go?

The analyst said he expects the Fed to continue to hike in May and keep high rates for a longer period of time than markets are currently factoring in, which may represent a headwind for further gold advances in the very near-term.

“If recessionary concerns in the United States become more widespread down the road, gold will be then perceived as the preferred asset to own in this phase, luring outflows from the stock market as corporate earnings fall and the Fed might be compelled to shift its policy. In such a scenario, we should expect gold to set new all-time highs,” Cingari added.

Silver soaring

Meanwhile, silver (SI=F) has also been having a great performance after it reached a fresh 12-month high above $25.7.

“The silver price appears supported by both technical and fundamental reasons and is inserted in a solid bullish environment,” Doug Turner also noted.

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