Gold futures made significant strides on Thursday, with the February contract closing at $2,746.30 after reaching an intraday high of $2,757.60. This rally brought the precious metal close to the previous peak of $2,760 set on December 12. The surge was driven by disappointing retail sales data and the resulting weakness in the U.S. dollar.
The price of February gold nearly matched its December high when it traded as high as $2,759, before edging slightly higher to $2,761 on the prior day. However, gold’s December peak was short-lived, as the price dropped $48.60 to settle at $2,705.20. This decline followed an unexpected inflation report, specifically the Producer Price Index (PPI) for November, which showed a 0.4% monthly increase, double the forecasted 0.2%. This increase, following a 0.2% rise in October, pushed the annual headline PPI to 3%.
The market’s reaction to the PPI data triggered a sharp correction, with February gold futures falling to $2,598.10 by December 18. After a modest recovery of $10.40 on December 19, gold resumed its upward momentum, gaining approximately $148 and reaching Thursday’s settlement price of $2,746.30. The $24.30 (0.89%) increase on Thursday came as a response to a weaker-than-expected retail sales report.
The U.S. Commerce Department reported that December retail sales rose by just 0.4%, falling short of the anticipated 0.5% increase and down from the revised 0.8% rise in November. This underperformance, combined with a lower-than-expected core Consumer Price Index (CPI) reading from Wednesday, has fueled expectations of Federal Reserve interest rate cuts, pressuring both the dollar and bond yields.
Christopher Louney, commodities strategist at RBC Capital Markets, commented on the market dynamics, stating, “Gold’s data dependency is clearly evident in pricing, especially with this week’s inflation data and the subsequent shift in swap traders pricing in a rate cut by July. While our price outlook remains unchanged, this reflects the bouts of strength (and weakness) we expect for gold. Overall, this should help gold maintain its resilience.”
Despite the market’s optimism, a rate cut at the upcoming Federal Open Market Committee (FOMC) meeting on January 29 remains unlikely, with only a 2.7% probability. Interest rate futures traders are now eyeing July for the first potential rate cut, with just a 25.2% chance that the Fed will maintain its current interest rate of 4.25% to 4.50%.
