Gold’s rising demand and steady top price over $1,800 suggest that inflation is expected to increase.

Gold prices remained close to a six-month high on Wednesday after a significant increase the previous trading session, as markets anticipated an interest rate increase from the Federal Reserve later in the day as well as their comments on lessening inflationary pressures.

Rationales for gold prices peaking

Indications that pricing pressures in the nation have peaked and are set to retreat led to a strong increase in gold prices on Tuesday as data indicated that the U.S. consumer price index (CPI) inflation dropped further in November.

As a result of tighter monetary conditions, declining gasoline prices, and sluggish economic growth in the US, data showed that CPI inflation fell more than expected to 7.1% in November. It was also the lowest inflation figure in a year. 

According to the conclusion of the Fed’s 2022 final meeting, the central bank is expected to increase interest rates by 50 basis points (bps).

The markets will, however, be closely watching a statement by Fed Chair Jerome Powell following the meeting to determine if the institution believes that inflation has decreased enough to start further slowing its pace of interest rate hikes.

Climbing gold prices might be explained by central banks’ gold demand which has hit a record level since November this year. Central banks globally have accumulated dramatically their reserves of gold that demand for this metal has risen 28% this year. 

Central banks’ demand of stocking up gold

Among numerous reasons, gold piling-up is considered as an alternative to foreign currency reserves and a hedging strategy against the weakening trend of USD from the beginning of this year.

The demand from central banks increased significantly in the preceding quarter, setting a record of about 400 tons that increased total central bank net purchases to 673 tons.

Gold is regarded as a good inflation hedge, although some analysts think this to be true only over exceptionally long time horizons spanning over a century or more, 

Given that the Fed has mostly maintained a hawkish position against inflation this year, the risk-driven markets’ surge on Tuesday was also curtailed by expectations around the Fed.

Fed attacked metal markets 

The Fed hammered the metal markets this year with a string of abrupt interest rate increases as it prioritized battling pricing concerns. In the near future, markets are expected to gain from any indications of lesser rate increases.

Tuesday saw significant advances for a number of other precious metals. When compared to silver, platinum futures increased by 3.3%.

Among industrial metals, the price of copper on Wednesday decreased due to the ongoing ambiguity around demand in China, a major importer. Copper futures had decreased by 0.2% to $3.8407 per pound.

The red metal also increased in value on Tuesday as a result of a weaker dollar, although gains were restrained by worries about weak demand in the near term.

As it eases various limitations related to the virus, China, which is currently dealing with its worst COVID outbreak to date, is anticipated to witness an increase in cases.

On the other hand, production of the red metal may become more constrained in the near future, particularly in light of the instability in Peru, the second-largest producer of copper in the world.

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