Gold prices soared over 1% on Wednesday, indicating a potential new leg higher for the precious metal. As inflation in the United States shows signs of cooling, the Federal Reserve could reconsider its interest rate hike cycle. This development has led to increased optimism among investors and signals an opportunity to diversify portfolios with gold.
The spot price of gold rose 1.3% to $1,957.32 per ounce, and U.S. gold futures settled 1.3% higher at $1,961.70. A modest rise in U.S. consumer prices in June and a smaller-than-expected annual increase sparked hope in the market. Tai Wong, a New York-based independent metals trader, commented in a recent interview with Kitco, "Gold gapped $10 higher on the softer-than-expected CPI print on hopes that a July hike might be the last one of the cycle." The market anticipates that if gold breaks above the 50-day moving average at $1,960, it could trigger more bullish bets.
The dollar stumbled 1% to its lowest in over a year against major currencies following the U.S. inflation report, making gold more attractive for holders of other currencies. Lower yields on 10-year U.S. notes also favored gold, as these two assets typically move in opposite directions.
Gold is highly sensitive to rising U.S. interest rates because these increase the opportunity cost of holding non-yielding bullion. The prospect of the Fed easing its monetary tightening stance could therefore be beneficial for gold prices. Despite a analysts seeing 91% chance of a 25-basis point Fed rate hike later this month, the market seems to be betting on a halt after this increase.
Economic activity in the United States has grown slightly in recent weeks. The U.S. central bank's latest "Beige Book" survey indicates that five out of its 12 districts reported some growth, while two reported modest declines. Overall, economic expectations for the coming months anticipate slow growth, signaling cautious optimism in the marketplace.
Despite multiple rate increases over the last year, the economy continues to show growth. However, the most recent inflation data presented a benign view of inflation, adding to the hope that the Fed's preferred measure of inflation - the personal consumption expenditures price index - would decline, aligning it closer to the central bank's 2% target.
Adding gold to your portfolio can offer several benefits, including acting as a hedge against inflation and providing portfolio diversification. Historically, gold has had a low to negative correlation with stocks and bonds, which can make it an effective tool for diversifying a portfolio. In times of market turmoil or economic uncertainty, gold prices often rise as investors seek safe-haven options, potentially offsetting losses in other asset classes.
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