Gold Prices Drop Amid Rise in US Inflation, Boosting Hopes for Interest Rate Hikes

Gold Falls as Accelerating US Inflation Raises Odds of Fed Rate Hike

Gold prices declined for a second consecutive day after a sharp increase in US inflation raised the likelihood of a Federal Reserve interest rate hike later this year. As of the current market, bullion is trading around $4,695 an ounce, following a 0.4% decline on Tuesday. The US consumer price index rose in April, marking its largest increase since 2023. Notably, when adjusted for inflation, wages experienced a decline for the first time in three years.

The market is now pricing in a higher probability of a Fed rate hike by year-end, with overnight-indexed swaps indicating a more than 40% chance, up from nearly zero at the end of last month. US Treasury yields rose as investors sought compensation for holding bonds amidst elevated energy prices, which are expected to keep inflation elevated. However, gold has managed to avoid significant losses despite growing expectations of a rate hike, attributed to its "asymmetric" relationship with interest rates.

Historically, gold prices have remained resilient during periods of rising interest rates, only to rally when rates decline. This trend is not new, and Yuxuan Tang, Asia head of rates and FX strategy at JPMorgan Private Bank, attributes it to strong demand, particularly from central banks. Central banks' buying activity has supported the metal's ability to deliver an uncorrelated return profile.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The recent move by India, the second-largest gold consumer, to raise import tariffs on gold and silver to around 15% from 6% is also worth noting. This decision is part of India's efforts to defend its currency and shore up foreign-exchange reserves. As of 11:20 a.m. in Singapore, spot gold was 0.4% lower at $4,695.18 an ounce, while silver was relatively unchanged at $86.47. Silver has, however, seen a 17% increase in May. In contrast, platinum and palladium prices declined.

The Bloomberg Dollar Spot Index rose 0.1% after increasing 0.3% in the previous session.