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Gold falls sharply, as inflation data bolsters case for rate hike

CommoditiesSep 28, 2015 01:02PM ET
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Gold fell by more than 1% on Monday to drop below $1,135

Investing.com -- Gold futures fell sharply on Monday amid a wavering dollar, as relatively optimistic personal income data reinforced the argument for an imminent interest rate hike by the Federal Reserve.

On the Comex division of the New York Mercantile Exchange, gold for December delivery traded in a broad range between $1,127.50 and $1,147.80 a troy ounce before settling at $1,133.60, down $12 or 1.05% on the session. Last week, gold peaked at a September high of $1,155 an ounce after Fed chair Janet Yellen said it is likely the U.S. central bank will raise its benchmark Federal Funds Rate at some point this year. In spite of a volatile month of trading, gold futures are up roughly 1% in September after opening the month around $1,125 an ounce.

Gold likely gained support at $1,104.10, the low from Sept. 14 and was met with resistance at $1,149.80, the high from Sept. 25.

On Monday morning, the U.S. Department of Commerce's Bureau of Economic Analysis (BEA) said its Personal Consumption Expenditure (PCE) Index increased by $54.9 million or 0.4% in August, or at the same rate as its increase a month earlier. Personal income rose by 0.3% last month, following an upward revision of 0.1% in July to 0.4%.

The Core PCE Index, which strips out food and energy prices, increased 0.4% on a month-over-month basis, on the back of strong gains in durable goods and motor vehicles and parts. It follows an increase of 0.3% in July.

On a yearly basis, Core PCE inched up 0.1% from its July level to 1.3% over the last 12 months. The Core or Real PCE Index is the Fed's preferred gauge for inflation, as it decides whether to raise short-term interest rates for the first time in nearly a decade. Long-term inflation has remained under the Fed's targeted goal of 2% in every month for the last three years.

Last week at a speech at the University of Massachusetts at Amherst, Yellen noted that the inflation shortfall is likely to be transitory, as one-off factors such as lower energy prices and weaker imports due to a stronger dollar abate. Yellen added that inflation should reach the Fed's 2% target when the labor market returns to full employment.

Gold, which is not attached to interest rates or dividends, struggles to compete with high-yield bearing assets in rising rate environments. Separately, New York Fed president William Dudley told the Wall Street Journal on Monday that the Fed is on track to hike rates before the end of the year and could reach its targeted goal for inflation at some point in 2016. In its inflation forecasts earlier this month, the Fed estimated that inflation would reach 1.7% by the end of next year and not hit 2.0% until 2018.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.20% to an intraday low of 96.04 on Monday. Last week, the index surged above 96.85 to reach its highest level in September.

Dollar-denominated commodities such as gold become more expensive for foreign purchasers when the dollar appreciates.

Silver for December delivery plunged 0.556 or 3.68% to 14.555 an ounce.

Copper for December delivery fell 0.035 or 1.53% to 2.249 a pound.

Gold falls sharply, as inflation data bolsters case for rate hike
 

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