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Gold hits 5-month high on growing hopes of Fed rate pivot

Coronavirus Dec 01, 2022 14:44
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By Barani Krishnan

Investing.com --  After 15 weeks of being trapped in the claws of $1,700 pricing or lower, gold broke free to hit a 5-month high above $1,800 an ounce on Thursday as easing U.S. inflation and jobs growth pointed to the likelihood of smaller Federal Reserve rate hikes from hereon.

U.S. gold futures’ benchmark February contract settled at $1,815.20 per ounce on New York’s Comex, rising $55.30, or 3.1%, on the day. The session peak was $1,818.25, marking a high since the $1,830 high on June 30. 

The spot price of gold, which is more closely followed than futures by some traders, was at $1,800.62 an ounce by 14:10 ET  (19:10 GMT). Spot gold’s peak for the day was $1,803.99.

The Dollar Index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, fell to a 3 -½ month low of 104.578 on the increasing chance of a Fed rate pivot. 

Bond yields benchmarked to the 10-year Treasury note, meanwhile, fell to a three-month low of 3.54%.  

It was a remarkable flight for gold bulls, who had seen the spot price go from a low of $1,616 to just shy of $1,804 — up $188 — in less than 30 days. 

Gold has started December with a spring, rising 3% after November’s 7% gain. Prior to that, the yellow metal was down seven months in a row, falling from a near record high just shy of $2,080 to $1,618.

Silver, which often follows the direction in gold, rallied sharply into December too, with the benchmark futures contract on Comex hitting a seven-month high of $22.94 while spot silver hit a similar milestone with $22.74. Silver is up 5% month-to-date after rising almost 14% in November. 

“After months and months of trading sideways and in the red, it looks like we’re suddenly off to the races on gold and silver,” said Phillip Streible, chief market strategist for Blue Line Futures in Chicago. “The word on the street is ‘buy precious metals at all cost’ because the Fed’s finally going to do the pivot. 

“It remains to be seen how far we’ll go with both though, because directionally, you can never tell for sure with these two. That said, the December-February period is a seasonally stronger time for gold, so there’s a lot of positive things teeing up here,” added Streible.

Sunil Kumar Dixit, chief technical strategist at SKCharting.com, concurred with Streible.

“Gold bulls will need to exercise care because, chart-wise, some profit booking may be seen at these heights,” said Dixit. 

But momentum could also lift the yellow metal to levels seen earlier in the year, when it soared to near record highs of above $2,000 in April, he said.

“At the moment, spot gold’s weekly resistance sits at $1,806. A weekly close above $1,806 is verily needed as affirmation of further ascent to the next decisive walkthrough of 1,830 and 1,842.”

Gold’s rally came as U.S. inflation and job growth indicators eased while the economy expanded, paving the way for the Fed to adopt smaller rate hikes.

The Personal Consumption Expenditure Index, an inflation indicator known as the “PCE” and closely tracked by the Fed, grew by an annual rate of 6% in October versus a 6.3% growth in the year to September, the Commerce Department said on Thursday.

Jobs growth, which has been blamed for runaway inflation in the United States, has begun easing too.

U.S. employers slashed 76,835 jobs in November, some 127% more than in October and five times more than a year ago, private employment tracker Challenger, Gray & Christmas, Inc. said earlier on Thursday. 

Prior to that, payrolls processor ADP (NASDAQ:ADP) said private sector employers in the United States created just about 127,000 jobs in November, the smallest in almost two years.

The labor market has been the juggernaut of the U.S. economy over the past two years, spearheading its recovery from the coronavirus pandemic which broke out in 2020.

Joblessness among Americans reached an all-time high of 14.8% in April 2020, with the loss of some 20 million jobs after the COVID-19 breakout. Since then, the Labor Department’s nonfarm payrolls report has reported hundreds of thousands of job additions every month. The national jobless rate has remained for almost a year now at below the 4% level that the Federal Reserve defines as maximum employment. U.S. average hourly earnings have also risen without stop since June 2021.

For November though, the trend may have begun changing, with the Labor Department expected to issue on Friday a nonfarm payrolls report with just around 200,000 new jobs, in what would be the smallest monthly increase since December 2020.

The slowdown in the PCE and jobs growth came after Wednesday’s data on Gross Domestic Product, which measures the economy, showed a 2.9% expansion in the third quarter, following a 1.6% contraction in the second quarter and 0.6% growth in the first quarter.

Inflation, measured by the Consumer Price Index, or CPI, expanded by 7.7% during the year to October, growing at its slowest pace in nine months after peaking with a 9.1% growth during the 12 months to June.

The drop in inflation came after relentless interest rate hikes by the Fed, which has added 375 basis points to rates since March. Prior to that, rates peaked at just 25 basis points, as the central bank slashed them to nearly zero after the global COVID-19 outbreak in 2020.

Despite such aggressive rate hikes, inflation remains more than three times higher than levels preferred by the central bank, which has vowed to get the CPI back to its 2%-per-year target.

Fed Chairman Jerome Powell said on Wednesday the central bank could start slowing down the pace of U.S. rate hikes as early as December but won’t stop its monetary tightening as inflation was still growing way above levels it desired.

After four straight jumbo-sized hikes of 75 basis points between June and November, markets expect the Fed to impose a smaller increase of 50 basis points at its upcoming rate decision on Dec. 14.

Gold hits 5-month high on growing hopes of Fed rate pivot
 

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