Gold Slides as High Inflation Keeps Fed Hawkish

Increasing inflation rates are impacting the price of gold. As the global energy crunch deepens, supply chain constraints continue and the cost of living rises, the Federal Reserve has become increasingly concerned about inflation.

Prices for gold went down last month after the latest U.S. inflation data revealed that the situation was worse than most pundits expected. In August, the consumer price index increased by 0.1% from July, surprising a market that was hedging its bets on median economist forecasts that predicted a small decline in the price index.

Soon after the release of the consumer price index (CPI) report, dollar and Treasury yields saw a surge in value that resulted in gold prices going down by as much as 1.6%. The Fed had already taken a hawkish stance in an attempt to forestall inflation in the country;  the recent CPI report is expected to keep the Fed on its hawkish track.

Fed officials raised the benchmark interest rates for two months in a row as increases in the price of food, shelter and medical care increased the cost of living. With the economy still in a slump, living costs steadily rising, and the ongoing Russia-Ukraine war exacerbating the energy crisis, experts predict another 75 basis-point increase.

Oanda senior market analyst Ed Moya said that there will definitely be a 75 basis-point increase in this month and that there is little chance of seeing a reduction in benchmark interest rates in November.

The consumer price index rose by 8.4% over the last year, and excluding volatile energy and food costs, it went up by 0.6% in July and 6.3% from July 2021. The food index went up by 0.7% last month while shelter costs increased by 0.7% in August, and 6.2% from last August. Medical costs went up as well, rising by 0.8% in August and 5.6% year-over-year.

Several markets, including gold, saw prices slump after the release of the report, with Mike Loewngart, Morgan Stanley’s Global Investment Office’s head of model portfolio, stating that it was a stark reminder that we still had a long road before we could bring inflation levels down.

By Sept. 12, 2022, gold prices in New York had fallen by 1.1% to $1,706.18 an ounce, setting the pace for what may be a difficult month for holding bullion. Moya noted that the shockingly hot consumer price index report “pulled the rug” out from under gold investors who were expecting a small decline in inflation levels.

Established producers of bullion such as Royal Gold Inc. (NASDAQ: RGLD) are unlikely to be fazed by these market movements since these cyclical price adjustment are to be expected from time to time.

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