Is gold ready to rally again, or will inflation hand control back to bears?

Gold prices rose on Tuesday as a softer US dollar helped bullion recover from two sessions of losses, while investors turned their attention to inflation data that could decide whether the Federal Reserve raises rates next week.

Spot gold gained 0.6% to $4,429.89 an ounce in early Asian trading, while December US gold futures were little changed at $4,475.10.

The dollar index fell about 0.4%, making bullion cheaper for buyers using other currencies.

Gold remains below its late-August highs after stronger-than-expected US payrolls revived expectations for tighter monetary policy.

A weaker dollar gives gold room to rebound

The dollar’s retreat offered immediate support after gold came under pressure from Friday’s jobs report.

US employers added 162,000 jobs in August, while unemployment held at 4.1%, according to the Bureau of Labor Statistics.

July payrolls were also revised to a 21,000 increase from an initially reported decline of 23,000.

That report pushed markets to assign roughly a 60% probability to a September Fed increase, compared with about 50% before the data.

Saxo Bank commodity strategist Ole Hansen said in comments carried by FXStreet that the stronger employment report had lifted bond yields and reinforced expectations of a September rate rise, creating pressure on both gold and silver.

Higher interest rates generally hurt gold because the metal offers no yield. Tuesday’s weaker dollar has interrupted that pressure, but has not removed the underlying rate risk.

CPI and PPI become the next policy test

Attention now turns from employment to inflation.

The Bureau of Labor Statistics will release August producer prices on Thursday followed by consumer prices on Friday. The Fed then holds its policy meeting on September 15-16.

That sequence makes the inflation reports unusually important.

A hotter reading would strengthen the argument for another increase in borrowing costs, potentially pushing Treasury yields and the dollar higher again.

Softer inflation could reduce the urgency to tighten and give gold room to extend Tuesday’s recovery.

Analysts see the inflation releases as the key remaining test after strong payrolls reopened the September rate-hike debate.

Central-bank buying keeps structural support intact

Gold’s short-term sensitivity to Fed policy sits alongside a much more supportive longer-term demand picture.

Central banks added a net 23 tonnes of gold to reserves in July, led by China and Poland, according to the World Gold Council.

Official-sector demand had already reached 289 tonnes in the second quarter, up 62% from a year earlier.

Société Générale analysts, cited by The Wall Street Journal, see gold’s rally as increasingly broad-based, with support extending across institutional investors, derivatives markets and central-bank demand rather than relying solely on speculative buying.

Geopolitical tensions involving the US and Iran are providing another layer of defensive demand, even as higher oil prices threaten to keep inflation elevated.

Silver rose 1% to $66.78 an ounce, platinum gained 0.4% to $1,834 and palladium advanced 1% to $1,402.87.