Price of Gold Fundamental Daily Forecast – Record PPI Solidifies Chances of Faster Taper, Rate Hikes by Fed

Gold futures are trading sharply lower on Tuesday after a report showing a surge in U.S. producer prices likely solidified the chances of faster Federal Reserve tapering and a sooner than expected rate hike.

The Fed is due to kick off its latest monetary policy meeting on Tuesday, in which it is expected to discuss speeding up the tapering of its bond-buying program. The meeting wraps up on Wednesday afternoon, and will be followed by a press conference with Fed Chairman Jerome Powell.

At 14:46 GMT, February Comex gold futures are trading $1771.10, down $17.20 or -0.96%. Meanwhile, the SPDR Gold Shares ETF (GLD) is at $165.49, down $1.51 or -0.90%.

Producer Prices Rise 9.6% in November from a Year Ago, the Fastest Pace on Record

Wholesale prices increased at their quickest pace on record in November in the latest sign that the inflation pressures bedeviling the economy are still present, the Labor Department reported Tuesday.

The producer price index for final demand products increased 9.6% over the previous 12 months after rising another 0.8% in November. Economists had been looking for an annual gain of 9.2%, according to FactSet.

Excluding food and energy, prices rose 0.7% for the month, putting core PPI at 6.9%, also the largest gain on record. Estimates were for respective gains of 0.4% and 7.2%, meaning the monthly gain was faster than estimates but the year-over-year measure was a bit slower.

Demand for goods continued to be the bigger driver for producer prices, rising 1.2% for the month, a touch slower than the 1.3% October increase.

Final demand services inflation ran at a 0.7% monthly rate, much faster than the 0.2% October rate and a sign that the services side could be catching up in prices after lagging through much of the recovery.

Daily Forecast

Today’s PPI report likely took away any doubt the Fed will begin ending the most aggressive easing policies ever put in place by the institution.

The price action in gold indicates that traders are now certain policymakers will gradually reverse central bank policy at its December 14-15 meeting and bring both a faster taper and quicker rate hikes over the next several years.

The first rate hike is now forecast for June 2022, a sharp recalculation from the September survey when the first rate move wasn’t expected until the end of 2022.

However, ending the Fed’s stimulus in March opens the door to perhaps an April rate hike.

Although both consumer and producer inflation could continue to climb the next several months, gold’s gains are likely to be tempered because of higher rate expectations. Furthermore, the U.S. Dollar could surge even higher over the near-term, which would further reduce demand for the dollar-denominated asset.