Gold faces weekly rout as high US yields fuel Fed rate hike bets
- Gold heads for a 4.50% weekly decline despite modest Friday gains.
- US 10-year Treasury yields reach 5.15% as the US Dollar hits 19-month highs.
- December Fed hike odds approach 90% following elevated US inflation readings.
Gold (XAU/USD) is poised to finish the week with losses of nearly 4.50%, yet it is up 0.14% on Friday as the US Dollar (USD) caps its advance, following a hot US inflation report on the producer side. At the time of writing, XAU/USD trades at $3,879, near 13-month lows.
Bullion collapses nearly 4.5% as US inflation cements the Fed’s case for a rate increase
Overall, US inflation data this week has increased the chances that the Federal Reserve (Fed) will raise interest rates at its December meeting. Earlier, the release of the Producer Price Index (PPI) for October showed that headline PPI jumped 6.5% YoY, below forecasts but above September’s 6.3% print, largely due to higher transportation and warehousing prices. Core PPI, which excludes items like food and energy, was unchanged from the previous month at 5%, in line with estimates.
This, along with the release of the US Consumer Price Index (CPI) on Tuesday, prompted a reaction from most Fed officials, with many speakers this week expecting higher interest rates and noting that financial conditions are not restrictive.
On Friday, San Francisco Fed Mary Daly said she sees more rate hikes as firms seek to pass higher costs, while Boston Fed Susan Collins warned that inflation is spreading, warranting additional rate increases. Earlier, Chicago Fed Austan Goolsbee warned that inflation data suggest the situation is worsening, which “would make the Fed more aggressive.”
US Treasury yields continued to rise during the week, an indication that market players expect higher rates. The US 10-year Treasury yield is up almost two basis points at 5.15%, a tailwind for the Greenback.
The US Dollar Index (DXY), which measures the performance of the American currency against six others, is up 0.23% at 103.41, after refreshing a 19-month high of 103.42.
Markets priced in a nearly 90% chance of a 25-basis-point Fed hike in December, with a 10% chance of a 50-point increase, according to CME FedWatch.
Next week, Gold traders are looking for the release of the Federal Open Market Committee meeting minutes, Retail Sales data and speeches by Fed officials.
XAU/USD technical outlook: Gold extends its losses beneath $3,900
After its weekly decline, Gold appears to have bottomed near $3,873, slightly above the day's low of $3,867. Despite this, further weakness lies ahead. The market structure of consecutive lower highs and lower lows has extended, which puts into play a test of the year-to-date low of $3,852. A breach of the latter will expose the $3,800 psychological level, followed by the April 22, 2025, swing high-turned-support at $3,500.
On the other hand, the first resistance is $3,900. If Gold breaches that area, a move towards Thursday’s high of the day at $4,000 is on the cards. The next stop is $4,100, ahead of the confluence of the 50-day Simple Moving Average (SMA) at $4,154 and the 100-day SMA at $4,196.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
