Gold slumps as expectations of an early rate cut evaporate

Persistent high inflation sparked a risk-off tone across markets, with a stronger USD creating headwinds for commodities. Nevertheless, robust demand amid supply issues helped support prices.

Gold fell below USD2,000/oz after US inflation came in stronger-than-expected. Core CPI rose 0.4% m/m in January and diminished hopes of an early rate cut. Gold came under immediate pressure as US Treasury yields and the USD spiked after the print. The precious metal has held above this key psychological level since mid-December on the hope the US central bank would have to lower borrowing costs quickly. With that now looking highly unlikely, prices could come under further pressure if other economic data remains strong.

Prior to the inflation data, base metals edged higher as investor weighed the likelihood of a recovery in demand in China. Copper led the gains amid rising expectations that China’s copper market will tighten in the months ahead. A tight concentrate market, created by recent mine closures, have seen smelter processing fees fall to a record low of USD21.90/t. Following years of relentless growth, Chinese smelters are now being forced to postpone new plants, bring forward maintenance and even cut production outright amid heavy financial losses. There are also expectations that demand from China’s infrastructure and manufacturing sectors will offset the downturn in the property sector. Nickel also gained as the market reacted to news of further supply cutbacks. Earlier this week Glencore announced plans to mothball its loss-making Koniambo nickel operation in New Caledonia. Risk of disruptions in Indonesia are also rising.

Crude oil gained as concerns over demand were soothed by a bullish outlook from OPEC. Secretary-General of the oil producing group Haitham al-Ghais said global oil demand will continue strong growth this year and a peak in consumption doesn’t appear to be on the horizon. He points to positive signs in some parts of the economy, namely the US. However, OPEC’s monthly oil market report released earlier in the day raised some concerns about the group’s adherence to its recent production cuts. Only Kuwait and Algeria have implemented their share of cuts, with Iraq’s output well above the agreed quota. The OPEC+ alliance plans to decide in early March whether to extend supply curbs totalling about 900kb/d, in tandem with a 1mb/d cut by Saudi Arabia, into the second quarter. Some of the early gains in the session were crimped as the risk off tone triggered by the strong US inflation print weighed in investor appetite.

European gas prices extended further losses despite the market looking oversold. High inventories and the prospect of weak demand amid above-normal temperatures has emboldened bearish traders in recent weeks. Nevertheless, gas demand is still expected to remain robust later in the year, which will see European LNG imports continue to grow. North Asia LNG spot prices were relatively unchanged with some market still closed.