Gold slumped to its lowest level since early January after the latest US inflation data came in higher than expected, raising the prospect of the Federal Reserve continuing its interest rate hiking policy for a few more months still.
While inflation is clearly on a downward trend in the US, Tuesday’s figure showed the pace at which consumer prices are rising hasn’t slowed as much as the market was anticipating. With several Fed officials reiterating the need to ensure inflation is well and truly curbed before the US central bank eases off on its rate hikes, this latest data point will only serve to reinforce the bank’s commitment to implement further rate increases in the coming months.
This readjustment of how many more rate hikes the Fed is set to implement has prompted the price of gold to tumble as the prospect of interest rates rising diminishes the appeal of the precious metal, as it doesn’t generate a yield for its holders, with other interest-bearing assets favoured instead.
After a buoyant start to 2023 for gold, the reality check that interest rates still have some way to go before central banks will be satisfied that inflation is under control has dealt gold a heavy blow with the price having fallen over $100 an ounce so far in February.
How much further the price has to fall will be largely determined by the strength of support from central banks, including China, India and Turkey, who were significant buyers of the precious metal in 2022 and likely to continue to be so again this year.
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