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Due to the interest rate hikes in the U.S. the price of gold decreases

An unexpected increase in monthly consumer prices may lend credence to the argument for rapid rate rises from the Federal Reserve, causing gold prices to fall by more than 1 percent

By Pallav Jain
New Update
US Gold Price

An unexpected increase in monthly consumer prices may lend credence to the argument for rapid rate rises from the Federal Reserve, causing gold prices to fall by more than 1 percent and the greenback to surge. After the release of stronger-than-expected U.S. inflation statistics, spot gold prices fell by more than 1%, trading 1.6% down at $1,697.30 per ounce by 9:10 a.m. ET.

Futures in the United States market for gold dropped $18 to $1,709.90, a 1.8% decrease. "With 75 basis points already verified, gold has gapped down on higher-than-expected CPI. Trader Tai Wong from New York's Heraeus Precious Metals said the dollar's strength might keep gold under pressure.

The much-anticipated Consumer Price Index released by the Labor Department for August showed a 0.1% increase in prices compared to July. Those who study such things had predicted a 0.1% decline. Inflation increased by 8.3% annually, according to the data.

The 8.1% increase forecast by economists was below expectations. Price increases for non-food items, such as rent and utilities, contributed to a 0.6% increase in the Consumer Price Index (CPI) last month. Economists had expected a 0.3% increase, on average. The annual rate of core inflation has increased by 6.3%. All of the gold's overnight gains have been erased as investors react strongly to the fresh inflation data. Gold futures for December delivery were last seen trading at $1,723.90 an ounce, a decrease of over 1% from the previous trading day.

Relationship between gold price drop and interest rate hikes

The monthly consumer price index in the United States surprisingly increased in August, despite a decrease in the price of gasoline. This was due to increases in the price of rent and food. After holding steady in July, the Labor Department reported that consumer prices rose 0.1% in August. Year-over-year, the CPI, as shown here, grew 8.3% in August, slowing from July's 8.5% gain. With the US dollar not likely to achieve new highs barring an extremely hawkish Fed conclusion next week, the price of gold is expected to remain around the $1,690-1700 region for the time being. Wong stated, "However, it's probable that they will wait and see what happens at the next meeting in November.

Many analysts were caught off guard by the recent inflation report, as they had anticipated lessening inflation pressures in light of the statewide decrease in gasoline prices seen last month. Consumer costs across the board, including those for housing, food, and healthcare, were emphasized in the study. Gasoline prices fell by 10.6 percent, contributing to a 5 percent decline in the cost of energy as a whole.

It is worth noting that some economists and market observers have written off the prospect of a slowdown in the Federal Reserve rate rise any time soon. Against the backdrop of falling gold prices, the U.S. dollar is at session highs.

There has been an all-out increase in the value of the dollar as a result of this news. Because of the rise in the value of the dollar and the United States economy. In the previous session, yields were under pressure, and gold and silver prices rose. After a long-awaited uptick, market players may be tempted to cash in some of their gains. The CME Fed Watch tool predicts a 90% chance of one more rate rise of 75 basis points to battle inflation. Ifo institute predicts that Germany's economy, Europe's biggest, would fall next year as a major increase in energy prices due to the conflict in Ukraine extinguishes the possibilities of recovery from pandemic-related lockdowns.

More things to know

As aggressive Fed Funds hikes elevate real rates down the curve and the potential cost of storing the yellow metal in vaults grows in the face of unacceptably high inflation, we also believe that lease rates should be at persistent highs not seen in well over a decade. This will lead to ongoing gold selling pressure or a general lack of major demand far beyond 2023.

Lower gold prices in the future are predicted by TD Securities, which is good news for gold yields due to the increased demand for gold hedging during down markets.

Gold leasing rates tend to be more expensive and variable during a downturn market because miners are more prone to take out hedges with bullion banks. Given the current economic climate and the state of the commodities markets, it seems likely that central banks will continue to hold off on buying gold in favor of using their U.S. dollar reserves. This factor, too, ought to aid in increasing gold returns through the year 2023.

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