Gold prices surged on Friday, driven by escalating tensions in the Middle East, leading to heightened demand for safe-haven assets. This upward momentum persisted despite the release of stronger-than-expected U.S. inflation data.
In response to attacks on ships in the Red Sea by the Iran-aligned Houthi group in Yemen, U.S. and British forces initiated a series of strikes. This move also signaled an escalation in the Israel-Hamas conflict, identified as a key factor contributing to recent Houthi aggression. The unfolding geopolitical crisis fueled increased safe-haven demand for gold, prompting investors to turn to traditional havens.
Spot gold demonstrated a 0.3% rise, reaching $2,034.78 per ounce, while gold futures expiring in February experienced nearly a 1% increase, reaching $2,038.80 per ounce by 00:14 ET (05:14 GMT).
Despite the strength observed in gold prices on Friday, the week’s overall performance showed a marginal decrease, influenced by uncertainties surrounding U.S. interest rates.
On Thursday, the Consumer Price Index (CPI) data revealed that U.S. inflation exceeded expectations in December. This, combined with the ongoing strength in the labor market, reduced the urgency for the Federal Reserve to consider early interest rate cuts.
However, market traders continued to maintain their bets on potential early interest rate cuts by the Federal Reserve, as indicated by the CME Fedwatch tool. The tool reflected a more than 70% likelihood of a 25 basis point cut in March, up from the 64% probability before the release of the CPI data.
Analysts at ING expressed skepticism about this trend, stating it “simply looks wrong.” Several Federal Reserve officials echoed this sentiment, emphasizing that expectations for early rate cuts were overly optimistic. While a rate cut is anticipated later in the year, the timing will depend on easing inflation and a stabilizing labor market.
Following the CPI reading, the U.S. dollar found limited support, contributing to the resilience of gold prices. Additionally, the yellow metal is anticipated to benefit from a lower interest rate environment, as higher rates increase the opportunity cost of investing in bullion.