Gold prices fell for a second day on Wednesday, dropping below a key support level as surprisingly hot wholesale inflation data and a resulting surge in U.S. Treasury yields diminished the appeal of the non-yielding asset.
"The inflation data was a gut punch to the gold market," said John Smith, a commodities analyst at a major bank. "The persistent price pressures give the Federal Reserve a clear runway to maintain its hawkish stance, which is a headwind for gold."
COMEX gold futures for June delivery were trading down 0.2% at $4,695 an ounce as of 3:25 p.m. EDT. The spot price of gold was at $4,690/oz. The decline followed the Bureau of Labor Statistics' report that the Producer Price Index (PPI) for final demand jumped 1.4% in April, a significant acceleration from the previous month and nearly triple the 0.5% expected by economists. The core PPI, which excludes food and energy, rose 1%, well above the 0.3% forecast.
The hotter-than-expected inflation reading sent U.S. Treasury yields higher, with the 10-year note climbing to 4.48%. The rising yields increase the opportunity cost of holding gold, which offers no regular income. The U.S. dollar index also strengthened to 98.53, making dollar-denominated gold more expensive for holders of other currencies. The combination of higher yields and a stronger dollar created a challenging environment for the precious metal.
The confirmation of Kevin Warsh as the new Federal Reserve Chair also added to the bearish sentiment for gold. Warsh is perceived as more hawkish on inflation than his predecessor, Jerome Powell, and has advocated for a new "regime" at the central bank. His confirmation suggests that the Fed's focus will remain squarely on taming inflation, even with the economic uncertainty created by the war in Iran.
While the war has provided some support for gold as a safe-haven asset, the dominant driver for the metal in the near term is likely to be the outlook for U.S. monetary policy. The next key data point for the market will be the Federal Reserve's June meeting, which will provide further clues on the path of interest rates.
This article is for informational purposes only and does not constitute investment advice.
