Gold prices climbed to their highest level in more than two weeks on Friday, as investors anticipated that the Federal Reserve would lower interest rates early next year to support the U.S. economy amid rising inflation and Omicron variant concerns.
Gold, which is often seen as a hedge against inflation and currency devaluation, gained 0.4% to $2,052.69 per ounce as of 3:50 p.m. ET (20:50 GMT), its highest level since Dec. 4. It was on track for a 1.7% weekly gain, its second consecutive week of increase. U.S. gold futures settled 0.9% higher at $2,069.1.
The precious metal was boosted by a weaker dollar, which fell to a near five-month low against a basket of major currencies, making gold more affordable for foreign buyers. The dollar index was down 0.3% at 94.97, after touching 94.88 earlier, its lowest since July 6.
Gold also benefited from lower U.S. Treasury yields, which reduce the opportunity cost of holding non-yielding bullion. The benchmark 10-year bond yield was down 2.5 basis points at 1.43%, close to its lowest level since July.
Fed Rate Cut Expectations Rise After CPI Data
The main driver for gold’s rally was the rising expectations that the Federal Reserve would cut interest rates sooner than previously expected, after the latest consumer price index (CPI) data showed that inflation remained elevated in November.
The CPI rose 0.8% last month, slightly above the consensus estimate of 0.7%, and 6.8% year-on-year, the highest annual rate since June 1982. The core CPI, which excludes food and energy, increased 0.5% month-on-month and 4.9% year-on-year, both above the forecasts of 0.4% and 4.8%, respectively.
The inflation data added to the pressure on the Fed, which is expected to announce a faster tapering of its bond-buying program at its policy meeting next week, and possibly signal an earlier start of interest rate hikes next year.
However, some market participants believe that the Fed may have to cut rates instead of raising them, if the Omicron variant of the coronavirus leads to more lockdowns and slows down the economic recovery.
According to the CME FedWatch Tool, the probability of a rate cut in March 2024 rose to 18.8% on Friday, up from 12.5% on Thursday and 6.3% a week ago. The probability of a rate cut in June 2024 jumped to 46.9%, up from 34.4% on Thursday and 18.8% a week ago.
“Precious metals, including gold, are being driven higher by very aggressive rate cut expectations with the market pricing in a Fed cut in March and a total of 150 bps in 2024,” said Tai Wong, a New York-based independent metals trader. “It’s priced for perfection but the market usually discounts too zealously.”
Other Precious Metals Also Gain
Other precious metals also rose on Friday, following gold’s lead. Silver fell 1.2% to $24.12 per ounce, after touching a two-week high earlier. Palladium was down 0.9% at $1,202.46 after hitting its highest since Oct. 2 earlier. Platinum rose 0.7% to $969.67, its highest since Sept. 1. All three metals were on track for their second consecutive week of gains.
On the physical front, gold demand in India, the world’s second-largest consumer of the metal, fell sharply due to high domestic prices and weak seasonal demand. India’s gold imports in November plunged 77% from a year earlier to 7.3 tonnes, the lowest since April, according to a government source.
