(Bloomberg) — Gold fell as the latest US inflation report and surging crude prices reinforced bets that the Federal Reserve will raise interest rates this month.
Bullion extended losses to drop by as much as 1.7% following the producer price data, while the US dollar and yields rose. The headline numbers showed price increases were mostly in line with estimates. Swap traders are now pricing in a roughly 70% chance of a hike at next week’s meeting, up from about 60% earlier on Thursday.
Gold has stayed largely in a range either side of $4,400 an ounce in recent weeks as traders try to gauge the outlook for Fed policy, bracing for a raft of economic reports this week that could shift sentiment, including consumer price index figures due Friday. Higher interest rates are a headwind for the non-yielding metal.
“We would expect a September hike to generate a knee-jerk correction, but not to derail the broader recovery,” UBS Group AG strategist Joni Teves wrote in a note. “A hold would likely deliver a stronger upside response.”
Surging energy prices in particular have continued to press interest rate expectations higher. Brent crude spiked above $105 a barrel as rising tensions in the Middle East heightened concerns over global supplies.
Still, analysts at Standard Chartered Plc analysts see gold prices recovering in the coming months as the focus shifts to potential de-dollarization and government interventions in the bond market.
The perception that efforts to constrain US borrowing costs in the face of swollen deficits and debt levels would gradually erode the value of the dollar was a key driver of gold’s roughly 10% gain in August, in a revival of the so-called “debasement trade.” On Wednesday, the Treasury underwhelmed markets with a plan to buy up to $6 billion of longer-dated debt, which failed to halt a sell-off in long-dated bonds.
“The metal’s strength reflects a deeper unease building around US fiscal pressures, which continue to chip away at confidence in the long-term value of government debt — and, by extension, the currency used to finance it,” said Renisha Chainani, chief research officer at Mumbai-based bullion trader Augmont Enterprises Ltd. “Gold looks set to trade in a $4,300-to-$4,500 range, favoring a buy-the-dip, sell-the-rally approach for now,” she said.
Spot gold was 0.7% lower at $4,367.92 an ounce at 2:38 p.m. in London. Silver fell 4% to $64.53 an ounce. Platinum and palladium also dropped. The Bloomberg Dollar Spot Index rose 0.3%.
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