Gold edged lower after US inflation data for August came in hotter than anticipated, strengthening expectations that the Federal Reserve will raise interest rates at its policy meeting later this week. Bullion was trading near $4,340 an ounce, extending a third consecutive weekly decline. Underlying inflation, as measured by the core Consumer Price Index (excluding food and energy), rose by 0.3% from the previous month. Despite a modest rebound on Friday, gold was still down 1.8% for the week.
The prospect of higher interest rates typically diminishes the appeal of non-yielding assets like gold, even though it is often considered an inflation hedge. Traders are now pricing in an 86-88% chance of a US rate hike by the central bank this week, a significant increase from approximately 67% prior to the inflation data release. This elevated probability places pressure on the Fed to implement its first rate increase in three years.
Adding to inflationary concerns, oil prices jumped over 2% on Monday. This was driven by fresh Houthi attacks on Saudi Arabia and Iranian strikes on ships in the Gulf, exacerbating supply concerns following the closure of a key Saudi oil pipeline. Middle East diplomatic efforts also appeared to falter after a meeting between Iran and other Gulf states was postponed. Brent crude rose towards $107 a barrel, having rallied almost 9% last week. Goldman Sachs, however, still sees upside risk for gold, forecasting it to reach $4,900 an ounce by the end of 2026, despite expected price volatility. Other precious metals like silver, platinum, and palladium also saw declines on Monday.
