Gold prices holding support above $1,675 as UofM inflation expectations fall to one-year low

The gold market is holding critical support at around $1,675 an ounce as consumer sentiment continues to improve and inflation expectations remain anchored.

Friday, the University of Michigan said a preliminary estimate of its consumer sentiment survey edged up to 59.5 from August's reading of 58.2. The data was relatively in line with expectations.

The gold market, seeing some modest relief in initial reaction to the latest sentiment data. December gold futures pushed into neutral territory, trading near session highs at $1,678.10 an ounce.

Although sentiment is relatively stable, the report noted there is still a high level of uncertainty among consumers.

"After the marked improvement in sentiment in August, consumers showed signs of uncertainty over the trajectory of the economy," said Joanne Hsu, director of consumer surveys at the UofM.

A positive for the gold market, the survey highlighted falling inflation expectations. The report said that consumers see inflation rising 4.6% by next year, down from the previous projection of 4.8%.

The report said that this is the lowest inflation forecast in a year.

Five-year inflation expectations dropped to 2.9%, down from August's reading of 3.1%.

"However, it is unclear if these improvements will persist, as consumers continued to exhibit substantial uncertainty over the future trajectory of prices," said Hsu.

Economists have noted that if inflation expectations remain anchored, the Federal Reserve could slow the pace of its aggressive monetary policy stance. However, many economists have noted that it will take more than just one or two sentiment surveys to slow the current trend.

"The dip there will offer some comfort to the Fed as it looks to combat rising prices. That emphasizes the credibiliity of the Fed (along with falling gas prices) and gives them some breathing room," said Adam Button, chief currency strategist at Forexlive.com

Markets all but expect the Federal Reserve to raise the Fed Funds rate by 75 basis points next week. The CME FedWatch Tool puts the chance of a full 1% move at only 16%.

However, markets still see a much higher terminal rate near 5%, which some analysts said could keep a lid on gold prices.

By Neils Christensen

For Kitco News

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