Gold faces worst week in four months as rate hike bets weigh on markets

Gold prices are heading toward their sharpest weekly drop since early June, losing about 4.5 percent of their value over the week. Spot gold recovered slightly on Friday, ticking up 0.1 percent to $3,879.71 per ounce by the afternoon. This followed a brief high of $3,922.97 after new US economic data came out. US gold futures for December delivery ended the day mostly unchanged at $3,886.30 per ounce.

Market Factors

The US Producer Price Index for final demand rose 0.3 percent last month. This followed a much larger surge of 1.4 percent in September. A Reuters poll had predicted a slightly higher increase of 0.4 percent. Independent analyst Tai Wong noted that gold is struggling to hold onto its early gains because bond markets are still under pressure from the Federal Reserve's strict stance on interest rates. Wong added that while the new price index did not surprise on the high side like the previous month, core figures remain too high for policymakers. Earlier in the week, gold prices plunged 3 percent to a low not seen in over a year. That drop was driven by rising oil prices and hotter-than-expected Consumer Price Index numbers that fueled fears of higher inflation and prolonged high interest rates.

Rate Expectations

Financial markets currently price in a 91.4 percent chance of a 25-basis-point US interest rate hike in December. That figure was 96.2 percent before the release of the Producer Price Index. Meanwhile, the chance of a larger 50-basis-point increase dropped to 8.6 percent from 13.8 percent. Higher interest rates generally reduce the appeal of gold because the metal does not pay any yield. Other precious metals also suffered this week. Spot silver dropped 1.9 percent to $49.05 per ounce, platinum fell 1.9 percent to $1,490.06, and palladium gained 1.1 percent to reach $1,004.40. Silver, platinum, and palladium are all on track to finish the week with losses.

Context

Precious metals like gold often react strongly to changes in inflation data and central bank policies. When interest rates go up, investors tend to prefer assets that offer steady returns over non-yielding commodities. Market analysts watch these economic indicators closely to guess how central banks will adjust monetary policy.