Gold Dips as Markets Assess Prospects of Additional U.S. Rate Hikes

26 Sep, 2023

Gold Dips as Markets Assess Prospects of Additional U.S. Rate Hikes

Gold prices experienced a slight decline on Monday, influenced by the strength of the U.S. dollar. This came after U.S. Federal Reserve officials indicated that interest rates would remain at elevated levels for an extended period. However, the market exhibited limited movement as investors awaited upcoming inflation data later in the week.

Spot gold slipped by 0.1% to reach $1,923.94 per ounce by 1153 GMT, while U.S. gold futures also recorded a 0.1% decline, settling at $1,943.70. Gold appeared to be in a consolidation phase, particularly after failing to sustain levels above $1,930 per ounce in the previous week. Carlo Alberto De Casa, a market analyst at Kinesis Money, suggested that if the Federal Reserve decides to raise rates, gold could face additional downward pressure, potentially approaching the significant psychological level of $1,900.

Higher interest rates tend to discourage investments in non-interest-bearing assets like gold, primarily because gold is priced in U.S. dollars. Federal Reserve officials conveyed their caution on Friday regarding the possibility of further rate hikes, despite voting to maintain the benchmark rate at its current level last week. Three policymakers expressed uncertainty about whether the battle against inflation had been won.

Meanwhile, the U.S. dollar remained at a level not seen in over six months, and 10-year Treasury yields were near a 16-year peak. Investors are now eagerly awaiting the release of the personal consumption expenditures (PCE) price index, the preferred inflation measure of the Federal Reserve, scheduled for release on September 29.

Reflecting the prevailing investor sentiment, the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund (ETF), reported a decline in its holdings on Friday to their lowest level since January 2020.

In the realm of other precious metals, spot silver experienced a modest increase of 0.2%, reaching $23.57 per ounce, while platinum declined by 0.6% to $920.61, and palladium dropped by 0.4% to $1,244.22.

UBS noted that lower Chinese palladium imports due to potential destocking and the ongoing shift from palladium to platinum in auto catalysts could be factors influencing palladium prices. They emphasized that palladium's significant demand for use in electric vehicles (EVs) and the phase-out of combustion vehicles in Europe makes it highly sensitive to these developments, as it accounts for around 90% of total demand and lacks alternative sectors beyond modest industrial, jewelry, and investment demand.