Gold Dips Again, But Stays at Mid-$1,800 on U.S. Inflation Scare

© Reuters.

By Barani Krishnan

Investing.com - Gold prices fell for a second straight day but still closed above the key mid-$1,800 level — in spite of the twin weights of rallying U.S. bond yields and the dollar.

Bullion had a scintillating seven-session run that resulted in a net gain of 4.6% over two weeks, before profit-taking began on Monday. The downside continued on Tuesday although analysts said bullish momentum in the yellow metal did not seem to be over.

“The last couple of weeks has delivered strong gains for gold which now has its sights set on the summer highs above $1,900,” said Craig Erlam, analyst at online trading platform OANDA.

Gold last traded at $1,900 levels in June.

Prior to that, it hit record highs above $2,100 in August 2020 after rallying from below $1,500 in March, during the height of the coronavirus pandemic.

In Tuesday’s session, U.S. gold futures’ most active contract, December, settled down $12.50, or 0.7%, at $1,854.10 an ounce. It peaked earlier in the day at $1,879.35 — its highest since June 15.

Gold’s recent run-up was heightened by a Labor Department report that the U.S. Consumer Price Index, which represents a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% during the year to October. It was the fastest growth of the so-called CPI since November 1990, an acceleration driven mostly by pump prices of fuel running at seven-year highs.

Bullion has always been touted as an inflation hedge. But it wasn’t able to live up to that billing earlier this year as intense speculation that the Federal Reserve will be forced into a faster-than-expected rate hike sent Treasury yields and the dollar rallying instead.

That trend abated somewhat after Fed Chair Jay Powell assured earlier this month that the central bank will be patient with any rate hike that will only come after in the later half of next year.

But with the U.S. 10-year Treasury note, a key indicator of real interest rates, hitting a three-week high of 1.63% on Tuesday, the Dollar Index reached a 16-month peak of 95.85. That added to speculation that the Fed may have to dump its “patient-for-now” stance over inflation and raise rates faster than its planned timeline of between July and December 2022.

Higher interest rates favor yields and the dollar versus gold. The Fed must double down on tapering its pandemic-era stimulus and do two rate hikes next year if it has any hope of reining in inflation running at more than 30-year highs, James Bullard, the St. Louis head of the U.S. central bank, told Bloomberg Television on Tuesday.

In spite of such talk, gold did not crumble below the mid-$1,800 level, seen as a critical hold for its ambitions of returning to $1,900 pricing. At the height of Tuesday’s correction, gold lost $25, or 1.4%.