Gold Retreats on Inflation and Interest Rate Expectations

Gold prices declined today after rising more than 2 percent in the previous session, as the surge in oil prices sparked inflation concerns and fueled uncertainty regarding US interest rate expectations, casting a shadow on the non-yielding precious metal. Spot gold fell 0.6 percent to $4,028.13 per ounce, while US August gold futures dropped 0.9 percent to $4,033.90.

Gold had jumped more than 2 percent to $4,100.49 per ounce on Tuesday, recovering from a two-week low, after data showed that US consumer price inflation slowed more than expected in June.

Kelvin Wong, a market analyst at OANDA, said, “I believe the market has now moved past the consumer price index data, which is somewhat of a lagging indicator. Trump continues to impose a blockade on ships leaving the Strait of Hormuz, causing oil prices to rise and putting pressure on gold.”

Gold is typically viewed as a hedge against inflation, but it loses its appeal when interest rates rise, given that it generates no yield. Senior officials at the Federal Reserve (the US central bank) welcomed the decline in inflation rates in June, but noted the need for further data to confirm that price pressures are truly subsiding. The US producer price index is expected to provide a broader view of inflation and monetary policy expectations.

Data from CME’s FedWatch tool showed that investors now see a 58 percent probability of the US central bank raising interest rates at its September meeting, down from 76 percent before the consumer price index report. They also expect an 80 percent probability of a rate hike in December. In other precious metals, spot silver fell 0.6 percent to $58.29 per ounce, platinum dropped 0.1 percent to $1,630.17, and palladium rose 0.1 percent to $1,306.41.