Fundamental Analysis

Gold (GC) Futures Prices Fall Amid High Us Inflation Data

  • Investors are expecting a significant rate hike after a higher US inflation reading.
  • Both the Fed and Joe Biden’s administration are fighting to lower inflation.
  • Gold remains less attractive as interest rates rise in the US.

Gold (GC) futures prices collapsed after investors digested a higher reading on US inflation that stoked speculation about a significant Federal Reserve rate hike next month. The consumer prices index (CPI) report from the US Labor Department showed that the headline CPI increased by 8.2% annually as rents increased to their highest level since 1990 and food prices rose. Core CPI exceeded expectations at 6.6%, excluding food and fuel.

Investors have been concerned that major economies may be forced into recessions before inflation is controlled, which has recently caused extraordinary global market volatility.

Following the release of Thursday’s inflation figures, traders were making bets that the Fed would abruptly increase interest rates in three weeks, eventually pushing them to 4.75%–5% by the beginning of next year.

In addition, a measure of underlying inflation had its largest yearly increase in 40 years. Consumers also paid more for healthcare. The inflation report was released shortly after last week’s positive employment report, which revealed significant job growth in September and a decline in the jobless rate to a pre-pandemic low of 3.5%.

“This is not what the Fed wants to see six months into one of the most aggressive tightening cycles in decades,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

US CPI (Source: Bureau of Labour Statistics)
US CPI (Source: Bureau of Labour Statistics)

High inflation, currently running much above the Federal Reserve’s 2% objective, is a problem for the American central bank and President Joe Biden’s and the Democratic Party’s aspirations of keeping control of Congress in the upcoming election. Both parties are keen to see a drop in inflation. The war in Ukraine has also increased price pressures globally.

According to CME Group’s FedWatch tool, financial markets have nearly completely priced in the possibility that the Fed will raise rates by additional three-quarters of a percentage point at the policy meeting on November 1-2.

The story of attraction continues. The US dollar’s attraction as a yielding asset was further boosted by the higher inflation reading, leading to higher interest rates. At the same time, gold is losing its appeal as it remains a non-yielding asset. Therefore Gold (GC) futures may likely continue to see lower prices in the coming weeks.