Market Extra: Gold futures post biggest daily gain in nearly a month after U.S. inflation data

Gold futures finished higher on Tuesday, with prices scoring their biggest daily percentage gain in nearly a month as the U.S. dollar and Treasury yields declined in the wake of data showing that the cost of living was unchanged in October.

Gold for December delivery
climbed by $16.30, or 0.8%, to settle at $1,966.50 an ounce on Comex. That was the biggest one-day percentage gain for a most-active contract since Oct. 18, according to Dow Jones Market Data.

The U.S. consumer price index reading has “crushed what was left of any rate-rise betting in both Treasury bonds and the Fed Funds futures market,” Adrian Ash, director of research at BullionVault, told MarketWatch. “That’s crushed the dollar on the [foreign exchange] market and sent gold sharply higher” in terms of the greenback.

The U.S. consumer price index reading has “crushed what was left of any rate-rise betting in both Treasury bonds and the Fed Funds futures market.”

— Adrian Ash, BullionVault

U.S. inflation was flat in October as the cost of gasoline dropped 5.3% last month. Economists polled by the the Wall Street Journal had forecast a 0.1% advance in the consumer-price index.

See: U.S. inflation flat in October thanks to cheaper gas, CPI shows.

“The market wanted to see an inflation number lower than 3.3% and they got 3.2% on an annualized basis, so this was the wick that lit the flame for today’s [gold] rally,” said Adam Koos, president at Libertas Wealth Management Group.

Against that backdrop, the dollar and Treasury yields declined. The ICE U.S. Dollar Index
was down 1.4% at 104.17, while the yield on the 10-year Treasury
fell to 4.463% from 4.631% on Monday.

Weakness in the dollar tends to decrease the opportunity costs for investors considering dollar-priced gold as an option versus other perceived havens. Meanwhile, lower yields should raise the prospects for gold against government bonds.

The next step for the U.S. Federal Reserve, “sooner or later, now looks certain to be [interest] rate cuts,” said Ash. That’s “likely to cap and then help cut rates” at the Bank of England and European Central Bank too.

That would boost “what’s proving a very resilient uptrend in gold, as the opportunity cost for long-term investors falls along with the financing cost for speculative traders,” he said.

Still, Koos said that if the Fed “gets back on the mic, shouting anxious words indicating future rate hikes, in spite of the encouraging economic data we’re seeing, then that could put a stop to any upside momentum and send [gold] prices lower.” 

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