Gold prices rose on Wednesday after US inflation data came in softer than expected. The cooler inflation reading weakened the US dollar and increased hopes that the Federal Reserve may not raise interest rates again as soon as October.
Spot gold gained 0.7% to $4,209.71 per ounce as of 9:05 am ET (1305 GMT). Despite Wednesday’s rise, gold prices were still down 5.4% so far in September. US gold futures also moved higher. Gold futures gained 1.5% to $4,241.90 on Wednesday.
US inflation data
The main trigger for the gold move was the latest US inflation data. The Personal Consumption Expenditures (PCE) Price Index, a key inflation measure watched by the Federal Reserve, rose 0.3% in August after a downwardly revised 0.1% increase in July. The Commerce Department’s Bureau of Economic Analysis said this on Wednesday, according to Reuters.
Annual PCE inflation also remained below 3%. In the 12 months through August, PCE inflation rose 2.6%, compared with a downwardly revised 3.4% increase in July, according to The Bureau of Economic Analysis data.
Core PCE inflation
Core PCE inflation rose 3.0% year-on-year in August. The figure was unchanged from the downwardly revised 3.0% increase in July. Core PCE excludes food and energy prices and is closely watched by the Fed when assessing underlying inflation.
{{/usCountry}}Core PCE inflation rose 3.0% year-on-year in August. The figure was unchanged from the downwardly revised 3.0% increase in July. Core PCE excludes food and energy prices and is closely watched by the Fed when assessing underlying inflation.
{{/usCountry}}Also read: Dow, S&P 500, Nasdaq today: Why are US stocks rising after cooler inflation data?
US dollar falls
The softer inflation numbers pushed the US dollar lower. A weaker dollar can support gold because gold is priced in US dollars, making the metal cheaper for buyers using other currencies. Reuters reported that the dollar extended its losses after the inflation data. The inflation report also reduced expectations of another Fed rate hike in October. Investors are now less convinced that the central bank will raise interest rates at its next meeting.
Gold price outlook
Metals trader Tai Wong said the cooler core PCE reading helped gold. He said the core PCE figure was one-tenth below the market consensus, while the previous month’s figure was also revised lower.
Wong said the data may have created a short-term floor for gold around $4,100. Monday’s low was around that level, and he said the latest inflation data could help prevent gold from falling further in the short term, according to Reuters. Wong also said the inflation data could reduce the chances of an October Fed rate hike. He pointed out that inflation is currently a major focus for the US central bank.
Fed rate decision
The Federal Reserve is closely watching PCE inflation because it uses the PCE price measures for its 2% inflation target. The latest data therefore matters for future decisions on interest rates.
The Fed raised its interest rate this month to a range of 3.75%-4.00%. The central bank also indicated that further rate increases could come in the months ahead.
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Gold and interest rates
Gold usually benefits from lower interest rates or expectations of lower rates. That is because gold does not pay interest or a yield, so it can become more attractive when interest rates are lower.
Higher interest rates can make gold less attractive compared with assets that generate a yield. This is why expectations around the Fed’s next rate moves can have a strong impact on gold prices.
October Fed rate hike
New York Fed President John Williams also pointed to the possibility of limited further rate increases. He said policymakers probably need to deliver only one more rate hike this year to bring inflation back on track.
Williams also said there was “no urgency” for further action. His comments added to expectations that the Fed may not need to move quickly with another rate increase, according to Reuters.
Market expectations for an October rate hike fell after the inflation report. Financial markets were pricing in about a 37% chance of a rate hike in October, down from about 45% before the PCE data. CME’s FedWatch Tool showed this, according to Reuters.
Why is gold rising?
The key reasons are the cooler-than-expected core inflation reading, a weaker US dollar and lower expectations for an October Fed rate hike. These factors can make non-yielding gold more attractive to investors.
Other precious metals
Other precious metals were mixed on Wednesday. Spot silver fell 0.5% to $61.15, platinum rose 0.4% to $1,711.77, and palladium slipped 0.1% to $1,221.36. Silver, platinum and palladium were also heading for monthly declines. This means the gains in some metals on Wednesday had not erased their losses for September.