Renewed rate-hike risks could weigh on gold, Kitco analysis says

Gold could face renewed pressure if central banks extend their interest-rate increases, with higher bond yields and a stronger dollar creating potential headwinds for the metal, according to an analysis published by Kitco. The report points to inflation risks and resilient demand in Australia, the United States and the euro zone as reasons policymakers may keep tightening rather than consider their work finished.

The analysis says the Reserve Bank of Australia began the week by raising its policy rate by 25 basis points to 4.6%, a 15-year high. The increase was expected, leaving investors focused on the bank’s outlook. That outlook signalled concern about inflation pressures from higher energy costs, firm domestic demand and increasing technology prices associated with the artificial-intelligence boom.

Australian businesses are absorbing higher costs and either increasing their own prices or preparing to do so, while inflation has exceeded earlier projections, according to the report. Although economic activity is slowing, second-quarter growth was stronger than anticipated. That combination has left the RBA open to another increase if it is needed to return inflation to target, rather than committing to an end to tightening.

US inflation and demand in focus

In the United States, the analysis cites CME FedWatch pricing as showing roughly a 70% probability of a Federal Reserve rate increase at the October 28 meeting. It links those expectations to a combination of rising inflation expectations and consumer spending that remains resilient despite relatively high interest rates. The market pricing represents expectations about the decision, not a commitment by the Fed.

The University of Michigan’s September survey put one-year inflation expectations at 4.6%, compared with 4% in August and the highest reading since June, the report says. Five-year expectations also increased, reaching 3.4%. Attention is turning to August personal consumption expenditures inflation data, with consensus forecasts pointing to a 0.5% monthly rise in the headline measure and a 0.3% increase in the core measure.

US retail sales rose 1.2% in August after declining in July, while the retail sales control group increased 1.4%, according to the analysis. Stronger-than-expected employment growth provided another indication that activity was holding up under relatively high borrowing costs. Together, those figures underpin the report’s assessment that underlying consumer demand remains firm.

European yields add to gold’s challenge

In the euro zone, inflation is above 3% and could reach 4% by year-end, roughly twice the European Central Bank’s target, the report says. It describes Lagarde’s economic assessment as relatively positive, citing manufacturing, employment and investment. Markets are pricing in as many as four additional increases over the next year, following two during the summer, while France’s 10-year government bond yield has moved above 4.7%.

Further tightening could reduce investors’ willingness to take risk, allowing bond-market pressures to spread to equities and digital assets, the analysis argues. For gold, which produces no income, higher yields increase the opportunity cost of ownership. A stronger dollar could create an additional obstacle. Those are conditional risks rather than a reported fall in gold prices, with forthcoming US inflation data and central-bank decisions remaining the immediate focus.