(Kitco News) - The gold market is seeing some volatility with a modest relief rally as U.S. inflation pressures continue to rise, but in line with economists' expectations.
Although higher energy prices are becoming embedded in the broader economy, according to some analysts, investors were fearing a much bigger jump in inflation.
The Consumer Price Index (CPI) rose 0.5% in May, following a 0.6% increase in
April, the U.S. Bureau of Labor Statistics announced Wednesday. The inflation data were in line with economists’ expectations.
In the last 12 months, headline inflation has jumped 4.2%, up from May’s increase of 3.8%.
At the same time, core CPI, which strips out volatile food and energy prices, rose 0.2% last month, compared to the 0.4% increase in April. Core inflation was slightly cooler than expected, as economists were looking for a 0.3% increase.
Over the past 12 months, annual core inflation rose 2.9%, up from 2.8% reported in April. Annual core inflation rose in line with consensus estimates.
With gold investors bracing for the worst, the yellow metal saw a bit of a relief rally in its initial reaction to the latest inflation data. However, the gold market still has significant ground to cover as analysts see further downside risks after prices broke below support at its 200-day moving average last week.
Although inflation is not spiraling out of control, it is still well above the Federal Reserve's 2% target, and markets are still pricing in potential rate hikes before the end of the year.
In a comment to Kitco News, Waleed Said, Technical Analyst at GivTrade, said that the weaker-than-expected core inflation is currently driving the market.
“That tells investors underlying inflation pressure is cooling, even if the headline number is still sticky. For the market, this is broadly dollar negative, gold positive, and mixed for oil,” he said. “The key message is simple: inflation is not dead, but this print gives the Fed less reason to sound aggressively hawkish.”
In a recent interview with Kitco News, Jeff Clark, Publisher of The Gold Advisor, said that although inflation is elevated, it is still not high enough to force the Federal Reserve to hike rates. He explained that with rising sovereign debt, the risks of rising interest rates outweigh the risks of inflation.
He added he expects gold will regain its luster when investors realise that the U.S. central bank is stuck.
