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Last week gold managed to regain its reputation as a safe haven asset. It was helped by rising inflation in the US, which also triggered a rebound in the US currency.
In the middle of last week, the US consumer price report for October was published. According to the data, the annual inflation rate rose to a more than 30-year high of 6.2%.
The record high figure has triggered a mixed situation in the market. Some investors are now confident that the Fed will continue to ignore the rise in consumer prices, believing it to be temporary. However, inflation will be more resilient and prolonged than previously expected as the supply problem caused by the COVID-19 pandemic will persist for a long time to come.
Other market participants believe that higher inflation will force the Fed to reconsider its decision to raise interest rates and the regulator will launch the process earlier than expected.
The first scenario is favourable for gold, which is traditionally considered one of the best hedging instruments against rising prices. And the second forecast supports the US currency, which has been waiting for a tightening of the Fed's policy for some time now.
Uncertainty over how the US central bank will behave in the face of record inflation triggered strong gains in two assets at once last week. Although gold and the dollar are in inverse correlation to each other, analysts emphasize.
At the end of the past seven days, the dollar index rose by 0.9%, while gold climbed by 2.8%. This is the biggest weekly gain for the asset since the beginning of May.
Bullion bars showed the most significant positive dynamics on Wednesday after the release of US consumer price data. The precious metal was up 1%.
On Friday, gold gained 0.3%, or $4.60. Towards the end of the session, the asset was trading at $1,868.50, its highest closing value since June 11.
At the end of last week, the precious metal received support from a slightly weaker dollar. The greenback declined on increased consumer fears.
On Friday the University of Michigan consumer sentiment index for November was published. The report showed a surprise drop to a 10-year low of 66.8 points (down from 71.7 in October). According to experts, this is due to the fact that Americans are very concerned about rising prices.
The release of inflation expectations data was also a positive sign for gold. For example, the estimate of the population's expected price increase over the next 12 months rose to 4.9%. This is the highest level since the summer of 2008.
The situation changed at the start of the new working week. The dollar index moved higher and hovered near a 16-month high, putting pressure on bullion.
This morning the price of gold fell by 0.43%, or $8.1, to $1,860.4. However, many experts believe that the gold rally is not over yet, as demand for safe-haven assets will remain strong in the face of higher inflation.
At this moment, only a more aggressive interest rate hike by the Fed could be a strong obstacle to further growth in the precious metal, experts say. However, officials' comments remain predominantly dovish.
On Sunday, for example, Federal Reserve Bank of Minneapolis President Neel Kashkari said that he expected inflation to continue rising over the next few months. However, he added that the US central bank should not overreact to higher inflation as it was likely to be temporary.
Analysts also point out that in the short term the asset may be influenced by the next wave of statistics from the US. As early as tomorrow, data on retail sales and industrial production will be published.
Economists expect both figures to rise. They estimate that last month retail sales increased by 1.1% and industrial production by 0.7%.
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