Gold Stabilizes After Steep Drop as Inflation Data Fuels Fed Hike Speculation

Gold prices were little changed on Friday, stabilizing after their sharpest daily drop in recent weeks as investors assessed fresh inflation data that strengthened the case for another Federal Reserve interest rate hike.

The precious metal fell 1.8% on Thursday, putting it on track for a third consecutive weekly decline amid pressure from a stronger U.S. dollar and rising Treasury yields.

Inflationary Pressures Mount

The latest catalyst for the sell-off was a U.S. government report showing the producer price index (PPI) rose 0.4% in August, the largest increase since May. This data heightened concerns that persistent inflation could compel the Federal Reserve to maintain its aggressive monetary policy stance.

Surging energy costs are a significant factor, with Brent crude prices climbing toward $108 a barrel. Rising oil prices can feed into broader inflation, adding to the pressure on the central bank. According to Investing.com, markets are now pricing in approximately a 70% probability of a Fed rate hike at its upcoming meeting.

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Market Impact and Outlook

Higher interest rates typically act as a headwind for gold, as they increase the opportunity cost of holding the non-yielding asset. The combination of rate hike expectations and rising bond yields has dampened investor appetite for the metal in the near term.

Despite the recent pressure, longer-term investment demand remains a supportive factor. The World Gold Council reported that global physically-backed gold exchange-traded funds (ETFs) saw significant inflows in August, with holdings increasing by 121 tonnes to a record 4,189 tonnes.

According to Tony Sycamore, a senior market analyst at IG cited by the source, gold remains below its 200-day moving average. He noted the metal would need to reclaim that key technical level to signal that its recent pullback is ending.