Gold prices fell on Monday as robust August inflation data solidified expectations for the Federal Reserve to raise interest rates at its upcoming meeting. The Consumer Price Index (CPI) rose by 0.4% in August from July, and 3.4% annually, exceeding the Fed's 2% target for over five years. Core inflation, excluding food and energy, increased by 0.3% monthly and 2.4% year-over-year. The "supercore" inflation measure, focusing on services excluding energy and housing, accelerated to 0.5% in August, indicating persistent price pressures.
Traders in the federal funds futures market now assign a 90% probability to a quarter-point rate hike at next week's Fed meeting. This sentiment is reinforced by comments from economists like Matthew Luzzetti of Deutsche Bank, who argues that strong economic growth, a tightening labor market, and elevated inflation make a rate hike very likely. Barclays economist Pooja Sriram anticipates two rate hikes this year, one in September and another in December, suggesting incremental moves might not be sufficient.
The rising likelihood of a rate hike negatively impacts gold because the precious metal offers no yield. Higher interest rates increase the opportunity cost of holding gold compared to interest-bearing assets like bonds. The 10-year Treasury yield is currently nearing 5%, further competing with gold as a store of value. Although gold saw a rebound of almost $100 per ounce on Friday after inflation data matched analyst forecasts, easing longer-term concerns, the immediate outlook is bearish due to the impending Fed decision.
Despite the short-term pressure, some analysts believe structural demand for gold remains strong. Central banks purchased a record 288.9 tonnes of gold in the second quarter of 2026, a 62% increase year-over-year, with China and Poland being major buyers. Gold-backed ETFs also saw significant inflows of $18 billion in August, reaching an all-time high of 4,189 tonnes. This underlying institutional demand suggests that any significant price dip might be viewed as a buying opportunity, preventing a durable collapse, with some major banks forecasting year-end gold targets between $4,500 and $5,200.
