Gold prices surged past $2,400 per ounce today, approaching the historic record set in May, following the latest Consumer Price Index (CPI) report from the U.S. Bureau of Labor Statistics, which showed a significant decline in inflationary pressures for June. This marked the first decrease in prices since early 2020. The unexpected drop in the June CPI data also bolstered expectations for a rate cut from the Federal Reserve.
The gold market responded positively to this news. Spot gold (Forex) surged by $42.79 to $2413.92, an increase of 1.8%. August gold futures saw significant gains as well, rising by $42.20 to $2421.90 as of 5:20 PM ET, up 1.77%, with an intraday high of $2430.40.
According to the report, the seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) declined by 0.1% in June, following no change in May. The seasonally adjusted CPI rose 3.0% year-over-year, lower than the market expectation of 3.1% and down from the previous reading of 3.3%. Core CPI also further eased, with a year-over-year increase of 3.3%, below both the market expectation and the previous reading of 3.4%.
The June CPI report provided new evidence for the Federal Reserve that inflation is slowing, indicating that the Fed is getting closer to reaching its goal of bringing the inflation rate down to 2%. On Wednesday, Federal Reserve Chairman Jerome Powell concluded his second day of testimony in Washington, stating that the central bank does not need inflation to be below 2% before cutting rates.
Skyler Weinand, Chief Investment Officer at Regan Capital, suggested that this CPI report could pave the way for the Federal Reserve to implement a rate cut as early as September, with a potential second cut in December if inflation continues to trend downward. Many analysts believe that if the August inflation report also shows a decline, the Fed could cut rates at least twice, possibly three times, this year.
The CME FedWatch tool now indicates a 92.7% probability of a rate cut at the September FOMC meeting, with an 84.6% probability of a 25-basis point cut and an 8.1% probability of a 50-basis point cut. The probability of maintaining the current rate stands at only 7.3%.
Gold has historically shown high gains and significant uptrends during rate cut cycles. The gold price increase over the past two years has been largely supported by its monetary attributes, reflecting a decline in the dollar’s credibility, although its financial attributes have still somewhat suppressed its performance. Once the rate cut trade resumes and U.S. Treasury yields decline, gold’s financial attributes could shift from being a drag to a supporting factor, with both financial and monetary attributes potentially driving gold to new historic highs.
