Gold Price Suffers from Interest Rate Fears: The Next Test Is Coming This Afternoon

Gold fell sharply yesterday, just like the stock markets and Bitcoin (BTC), following the somewhat disappointing inflation figures from the United States. The likelihood of an interest rate hike shot up, and the precious metal is suffering as a result.

An important level was breached on the chart, though the gold price is already attempting to recover that loss. This afternoon’s new inflation data could play a key role in that battle.

Yesterday at 2:30 p.m., financial markets took a dive after the Producer Price Index (PPI) came in slightly higher than expected. This has heightened concerns about higher consumer inflation and, above all, about potential action by the central bank.

Prior to the release of the figures, the market priced in a roughly 60 percent chance of an interest rate hike next week. That figure has risen to nearly 70 percent, according to the CME Group’s FedWatch.

Last week, the odds were still split 50-50, but now an interest rate hike is being seriously considered. This comes even as President Donald Trump had effectively made interest rate cuts a condition for his new chair.

An interest rate hike affects the bond market, which in turn puts pressure on the valuation of gold, which does not pay interest itself. The higher this “risk-free” rate, the less attractive it becomes to shift investments to gold or other assets.

Gold is known as an inflation hedge, but in practice, it all comes down to the real interest rate—which is the interest rate minus expected inflation. If the real interest rate rises, gold becomes less attractive, even if inflation itself is high.

It’s no surprise, then, that the precious metal lost nearly 2 percent yesterday. The price of gold fell from $4,405 (per troy ounce) to $4,317, with the biggest drop occurring shortly after the PPI figures were released.

This caused an important support level to be breached, but today a recovery of over 1 percent has already erased the losses. At least for now, as the day still has a long way to go.

At 2:30 p.m. this afternoon, the Consumer Price Index (CPI) will be released, and there’s a good chance gold will react volatility to it again.

If the figures are better than expected, confidence in an interest rate hike will wane somewhat. That would translate into falling interest rates in the bond market, a weaker dollar, and, most likely, a rising gold price.

But a repeat of yesterday’s events is, of course, also a possibility. Given that long-term interest rates are already rising so sharply, this could lead to a significant crash.