Gold rallies in volatile trade after hotter-than-expected inflation reading

Gold futures rallied Wednesday in volatile trade after a hotter-than-expected headline inflation reading prompted investors to turn to the precious metal as a hedge against rising retail-level prices.

Gold had risen earlier and then fell sharply before bouncing back.

April gold
GCJ8, +1.52%
was recently up $20.30, or 1.5%, to $1,350.50 an ounce. The gold-backed exchange-traded fund SPDR Gold Shares
GLD, +1.46%
gained 1.3%, while the VanEck Vectors Gold Miners ETF
GDX, +4.09%
) rose 3.9%.

The ICE U.S. Dollar Index
DXY, -0.41%
is off rose 0.4. Precious metals, which are often pegged to dollars, tend to rise when the buck weakens because a falling dollar can make buying those assets cheaper for investors using stronger monetary units.

The yield on 10-year Treasury notes
TMUBMUSD10Y, +2.06%
shot up to 2.882% after the data but was still trading below the four-year high of 2.891% hit Monday.

Rising yields, in theory, should detract from the appetite for gold because precious metals dont bear a yield. However, rising inflation could also provide a lift for gold over the short term because it is often viewed as a hedge against rising prices. Gold had been improving over the last few days after the futures contract erased 1.6% last week in its worst performance in two months.

Read : This chart warns that the 30-year downtrend in interest rates may be over

The consumer-price index leaped 0.5% in January, the biggest increase in five months. Higher consumer prices in January, however, didnt substantially alter the overall picture on inflation. The increase in the CPI over the past 12 months remained unchanged at 2.1%.

Still, the CPI report falls into the camp of the U.S. monetary-policy hawks, who would like to see the Federal Reserve raise interest rates at a faster pace, likely four small increases in 2018, said Jim Wyckoff, senior analyst at metals trading firm Kitco.com.

After stripping out volatile gas and food, the more closely followed core rate of inflation rose 0.3% last month. The 12-month rate of core inflation was also flat at 1.8%. And importantly, inflation-adjusted U.S. wages declined by 0.2% in January. The Fed is closely watching wage-induced inflation risks.

This data point will be closely watched to see if gold can hold $1,325 or goes in either direction sharply, said Jeff Wright, chief investment officer at Wolfpack Capital.

Check out: MarketWatchs Economic Calendar

U.S. stocks which had initially retreated following the CPI data recovered, setting the Dow on track for its fourth straight session of gains. Global equity markets have been recovering from their inflation-sparked selloff earlier this month.

Also potentially impacting stocks and the broader financial markets, sales at U.S. retailers fell by 0.3% in January the biggest drop in almost a year chiefly due to declines at auto dealers and home centers. And a previously reported increase in sales in December was wiped out.

In this case [after the data], we could see a renewed wave of selling on the stock markets for fear that the Federal Reserve might raise interest rates faster and more sharply. This could spark a renewed flight into safe havens, which would benefit gold, said Carsten Fritsch, commodities analyst at Commerzbank.

In other metals trading, March silver
SIH8, +1.22%
climbed 1.5% to $16.775 an ounce, while the silver-focused iShares Silver Trust
SLV, +1.28%
rose 1.3%. March copper
HGH8, +2.04%
gained 1.9% to $3.222 a pound, April platinum
PLJ8, +2.01%
added 2.2% to $997.50 an ounce and March palladium
PAH8, +1.62%
rose 1.7% to $997 an ounce.

Quote References GCJ8 +20.20 +1.52% GLD +1.84 +1.46% GDX +0.90 +4.09% DXY -0.37 -0.41% TMUBMUSD10Y +0.06 +2.06% SIH8 +0.20 +1.22% SLV +0.20 +1.28% HGH8 +0.06 +2.04% PLJ8 +19.60 +2.01% PAH8 +15.90 +1.62% Show all references
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