Gold Gains on Elevated Inflation, Market Focus Shift to the Fed’s December Meeting

Gold bar

Gold prices rose on Monday, supported by the consumer price index (CPI) that boosted the metal’s appeal as an inflation hedge. Market participants shifted their attention to the Federal Reserve’s policy meeting to get insights into its tapering plan.

Spot gold is currently trading at $1,785.47 per ounce as of 0730 GMT.

On Friday, the Labor Department reported that CPI increased by 0.8% in November or 6.8% on a year-on-year basis. It is the highest annual gain since 1982 and reinforced expectations that the Fed might start raising interest rates next year.

Asset Management managing partner Stephen Innes suggested that gold continues to hold the bid because it has become a defensive asset. He explained that the market already priced the bullion based on the Fed proceeding into a rate hike cycle. Innes suggested that the Fed’s new “dot plot” will be the key driver of gold price this week. Three dot plots will push the metal below $,1770 while two-dot plots will weaken the dollar and lift the bullion to around $1,810.

Another factor supporting the yellow metal is the steady dollar. The greenback barely moved as six G10 central banks will review their monetary policies. These include the European Central Bank (ECB), the Bank of Japan, Norges Bank, Swiss National Bank and the Bank of England. A Reuters survey of economic experts predicted the ECB to halve its monthly assets purchase in April.

On the technical front, Reuters technical analyst Wang Tao predicted gold to break a resistance level at $1,789. After that, it could move up to the next resistance at $1,805 per ounce.

DailyFX strategist Daniel Dubrovsky noted that rising the almost 39-year high inflation rate supported the bullion. But gold struggles below the critical resistance level. He suggested that the outcome of the Fed’s December meeting will dictate gold’s next move. Dubrovsky also predicted the dollar to re-establish an upward trend because of the central bank’s interest rate decision. The greenback also appears to be trading within a bull flag formation.

In physical trading, lower domestic prices lifted gold demand in top Asian hubs, including China, Singapore, and Japan. But in India, price volatility prompted jewelers to delay their purchases for the upcoming wedding season. Also, retail demand has fallen sharply in the last few days.