Gold pulls back after strong rally

LONDON (May 16) Gold (XAU/USD) trades slightly lower in the $2,380s on Thursday after making significant gains on the previous day. Gold bulls flexed their muscles following the release of US inflation data that led to a recalibration of interest rate expectations, with implications for both the US Dollar (USD) and Gold price. 

Gold stabilizes following rally after release of US data 

Gold price is correcting back on Thursday amid profit taking after an over one percent rise on the previous day. The release of cooler US Consumer Price Index (CPI) data and Retail Sales for April led to a change in expectations for the future path of US interest rates, a key factor in Gold valuations. 

The lower-than-expected CPI data reflected a disinflationary trend that brought forward the time when the Federal Reserve (Fed) is expected to make its long-awaited cut in interest rates. According to the CME FedWatch Tool, there is around 75% probability that the fed funds rate will be at lower levels after the September meeting. This is much higher than the 65% chance seen before the CPI release, according to FXStreet Editor Lallalit Srijandorn. 

The expectation of lower interest rates is positive for Gold as it reduces the opportunity cost of holding the non-yielding asset vis-a-vis cash or bonds. Gold is further lifted by the loss of value of the US Dollar (USD) that attended the data, as like most commodities Gold is chiefly traded in US Dollars. 

Still, the outlook for the precious metal remains positive against a backdrop of continued robust demand from central banks – in particular those in emerging markets – high levels of geopolitical risk and concerns regarding a fracturing of world trade along partisan lines.

Indeed, according to data from the World Gold Council (WGC), demand for Gold “rose by 3% to 1,238 tonnes, making it the strongest first quarter since 2016,” writes Srijandorn.   

FXStreet