Gold prices started October higher after softer-than-expected US inflation data tempered forecasts for another US Federal Reserve interest rate hike this month. However, elevated US Treasury yields continued to limit gains in the precious metal.
Spot gold rose to as high as $4,175.19 per ounce during Thursday premarket hours, while US gold futures for December surged over $4,204 per ounce.
The price action follows the US Bureau of Economic Analysis' report that the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 0.3% in August from July and 3.4% from a year earlier. The monthly increase was below the 0.4% rise economists had expected.
Core PCE inflation, which excludes food and energy, rose 0.2% month-over-month and 3% annually. Both measures were below economists' expectations, while revisions also showed that July's inflation was lower than previously reported.
Meanwhile, US consumer spending remained strong. Personal consumption expenditures increased 0.9% in August, while disposable personal income gained 0.3%.
The combination of cooler inflation and resilient spending gives the Fed a mixed picture as policymakers assess whether additional rate increases are necessary. Markets have subsequently reduced expectations for an October hike. Reuters reported that the probability of a rate increase fell to about 38% from 45% before the inflation report.
Why Lower Rate Hike Bets Can Support Gold
Gold does not pay interest or a dividend, which means its relative appeal can improve when interest rates and market yields fall.
When investors expect the Fed to keep raising rates, interest-bearing assets such as US Treasuries can become more attractive relative to gold. Higher rates can therefore increase the opportunity cost of holding bullion.
Conversely, expectations of fewer or slower rate increases can reduce that opportunity cost and support demand for gold.
That relationship was visible after the August PCE report, as softer inflation reduced expectations for another near-term Fed hike and helped gold move higher on 1st October.
Treasury Yields Remain a Key Risk for Gold
The bond market, however, is providing a significant counterweight to the softer inflation signal.
The US 10-year Treasury yield climbed to about 5.30% on Wednesday, its highest level since June 2002, even as markets reduced expectations for an October Fed hike. Longer-dated yields have been driven by factors beyond near-term Fed policy, including stronger economic growth and concerns around government borrowing and Treasury supply.
That creates a challenging backdrop for gold. Higher Treasury yields increase the return available from government bonds, raising the opportunity cost of holding a non-yielding asset such as bullion.
Reuters reported that elevated 10-year Treasury yields were already limiting gold's gains on Thursday, while a stronger US dollar was also making dollar-priced gold more expensive for overseas buyers.
Jobs Data Could Set the Next Gold Move
Markets will now turn towards US employment data, expected to be published on Friday, for further clues about the Fed's upcoming October decision.
With inflation cooling but remaining above the central bank's 2% target and Treasury yields still elevated, gold's next move could depend on whether incoming economic data reinforces expectations for fewer rate increases or revives concerns about further monetary tightening.
For now, softer PCE inflation has given gold a boost, but stubbornly high Treasury yields remain a hurdle to a sustained recovery.
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