Gold Tumbles on Rate Hike Bets Ahead of U.S. CPI Data

gold coins

Gold prices slipped on Monday as investors await the release of U.S. inflation data for December due later this week. It is expected to have increased from 4.9% in November to 5.4%. If that is the case, the Federal Reserve would likely raise interest rates earlier than expected. Though gold is considered an inflation hedge, it is very sensitive to U.S. interest rates. Fed funds futures are already priced in an almost 90% chance of an interest rate increase in March and almost the same change for another rate hike in July.

Another headwind for gold is the surge in U.S. Treasury yields. It lifted the opportunity cost of holding the non-interest-bearing bullion.

Spot gold is currently trading at $1,797.10 per ounce as of 0940 GMT.

Nicholas Frappell, the global manager at ABC Bullion, noted that traders are happy with the decline in gold prices. But they are still cautious because of higher yields. He also said that if inflation is higher than expected, it would confirm the Fed’s anticipated policy tightening.

In physical trading, there was a slight uptick in gold demand in India, though still lower than normal. Local dealers charged a premium of as much as $1 per ounce. But COVID-19 restrictions could reduce demand in the short term. India, the second-largest gold consumer in the world, imported a record $55.7 billion gold in 2021. That is more than double the previous year’s imports.

Singapore also continues to see festive buying ahead of the Lunar New Year. But in China and Japan, gold demand was subdued due to higher prices.

On the technical front, Reuters’ technical analyst Wang Tao predicted spot gold to test a resistance at $1,801 an ounce. A breach of that level could push the bullion up to the $1,815-$1,830 range.

Daniel McCarthy, a strategist at DailyFX, gold might come under pressure with the rising real yields. He noted the bullion’s failed attempt to rally toward the November 2021 high of $1,877.15. McCarthy also mentioned higher volatility at subdued levels as shown by the narrow width of the Bollinger Bands. A consistent breach of either Band will determine the gold’s price direction.

McCarthy sees the support level at the pivot points and previous lows of $1,761.99, $1,758.93, $1,753.10 and $1,721.71. On the topside, he expects resistance at $1,829.68, $1,831.65 and $1,877.15.