Gold extends drop below US$1,700 as inflation ups rate hike bets

GOLD extended a decline below US$1,700 an ounce as worse-than-expected inflation data out of the US earlier this week increased expectations of a prolonged period of monetary tightening.

Bullion slid as much as 0.7 per cent as Treasury yields and the US dollar edged higher, putting pressure on the non-yielding asset. US initial jobless claims unexpectedly declined, while retail sales rose month-on-month, providing little respite for the Federal Reserve as it tries to cool the American economy.

Earlier this week, US consumer and producer price indexes showed inflationary pressures remain in the economy, as the Fed prepares for its meeting on Wednesday. Investors are now fully pricing in a 75 basis point rate hike from the US central bank, while some are even predicting a full percentage point increase. 

Gold has slid almost 8 per cent this year as the Fed aggressively raises rates, which diminishes the appeal of assets that bear no interest. The US dollar’s advance has also pressured the metal, though increasingly hawkish rhetoric by European Central Bank officials is containing its rally.

“The yellow metal looks overvalued against a backdrop of rising real yields,” analysts at Morgan Stanley including Amy Sergeant wrote in a note.

Meanwhile, Chinese growth has slowed so sharply that several major banks do not even think a 3 per cent expansion is achievable this year. That could impact on gold jewellery demand in the world’s biggest consumer of the precious metal. 

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Gold dips on stronger dollar, Fed concerns

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Spot gold fell 0.7 per cent to US$1,686.35 at 2 pm in London, extending Wednesday’s decline. The Bloomberg Dollar Spot Index was steady. Silver also declined, while and palladium was stable and platinum edged higher. BLOOMBERG