Why gold is still falling even as Middle East tensions keep getting worse

Gold prices edged higher on Friday but remained on course for a third straight weekly decline as investors waited for US consumer inflation data that could decide whether the Federal Reserve raises rates next week.

Spot gold rose 0.4% to about $4,338 an ounce in Asian trading, after sliding sharply on Thursday.

Bullion is still down more than 2% this week as higher Treasury yields and stronger rate-hike expectations have eroded demand for the non-yielding metal.

The 10-year US yield has pushed close to 5%, while markets now see roughly a 70% chance of a September increase.

Hot PPI keeps pressure on gold

Thursday’s producer-price report hardened the view that inflation remains too persistent for the Fed to relax.

The producer price index rose 0.4% in August and 5.4% from a year earlier, according to the Bureau of Labor Statistics.

Goods prices climbed 1.1%, led by energy, while core producer inflation also accelerated on an annual basis.

That pushed Treasury yields higher and sent gold lower. The 10-year yield climbed towards 4.97%, while the 30-year yield rose above 5.3%.

Samer Hasn of XS.com said that gold is being squeezed by higher global bond yields and a Middle East conflict that is lifting oil prices and inflation expectations.

The complication is that geopolitical tension, normally supportive for gold, is currently strengthening the case for tighter monetary policy through higher energy costs.

CPI could decide whether the selloff extends

Friday’s consumer-price report is now the immediate test.

Consensus estimates compiled by FactSet point to headline CPI rising 3.3% from a year earlier, with core inflation at 2.4%. Markets have already pushed the probability of a September Fed hike to around 70%.

JPMorgan Private Bank strategist Stephen Parker told Barron’s that CPI may only move markets materially if it deviates meaningfully from expectations.

He is watching for signs that the energy shock is spreading into broader prices.

A hotter reading could push yields and the dollar higher again, extending gold’s weekly decline. A softer print could trigger a relief rally by reducing the urgency for the Fed to tighten.

Analysts noted that gold and silver have so far held the lower end of their recent ranges despite the jump in yields.

Structural demand still provides a floor

The short-term picture has weakened, but longer-term demand remains supportive.

The World Gold Council said global gold-backed ETFs attracted $18 billion in August, the second-largest monthly inflow on record.

Holdings rose by 121 tonnes to a record 4,189 tonnes, while assets under management reached $615 billion.

Central banks also remained net buyers in July, adding 23 tonnes, with China and Poland among the largest purchasers.

TD Securities analysts Ryan McKay and Bart Melek said that stronger data and a hawkish Fed could trigger further near-term selling, but they still see ETF demand, central-bank buying and concerns about currency debasement as a durable support base.

Silver fell 0.3% to $63.39 an ounce on Friday and is down more than 4% this week. Platinum and palladium were also headed for weekly declines.