Gold Price Rises to Two-Week High on Declining US Treasury Yield

Gold Price Rises to Two-Week High on Declining US Treasury Yields and Fed Minutes

The price of gold (XAU/USD) has surged for the second consecutive day, reaching a two-week high at approximately $1881. This upward momentum can be attributed to the decline in US Treasury bond yields, a phenomenon triggered by the release of the Federal Reserve's latest meeting minutes. At the time of writing, XAU/USD is trading at 1881.15, almost flat as the Asian trading session gets underway.

This increase in gold prices has been further supported by the US Dollar Index's retreat from the 11-month highs achieved last week, which has created a tailwind for XAU/USD. Additionally, benchmark yields on the US 10-year Treasury note have retraced from their highest levels since 2007, contributing to gold's ascent.

The minutes from the Federal Reserve's September monetary policy meeting revealed a nuanced outlook. Participants acknowledged the presence of both upside risks to inflation and downside risks to economic activity. This highlights the Fed's challenge in achieving its objectives, given the dual-sided nature of these factors. Policymakers also noted that as policy approaches its peak, decisions and communications should transition toward a longer-term perspective, emphasizing the maintenance of higher rates over an extended period.

In economic data released by the US Department of Labor, producer-side inflation figures exceeded expectations, with most figures surpassing those from August. However, the monthly reading for the Producer Price Index (PPI) expanded less than the previous month, indicating that inflation remains a concern. Factors contributing to this concern include high energy prices and the impact of the automobile union strike.

As a result of the Fed's dovish stance and the diminished likelihood of a Fed rate hike this year, the US Dollar experienced a decline, leading to falling Treasury bond yields. This, in turn, sent gold prices to fresh two-week highs at $1,877.

Fed Governor Christopher Waller contributed to the overall sentiment, stating that higher interest rates may assist the Fed in curbing inflation, allowing the central bank to adopt a "watch and see" approach to determine the necessity of further rate hikes.

As markets currently price in a mere 8.5% chance of a November Fed rate hike, down from around 13% the previous day, it's evident that a rate hike in December is more probable, with a 26% likelihood.

The weakened US Dollar has also been influenced by improved risk sentiment. The expectation of China's economic stimulus, a correction in oil prices, and dovish Fed expectations have collectively contributed to the bearish momentum in the US Dollar.

Looking ahead, gold prices are likely to be influenced by the upcoming United States Consumer Price Index (CPI) report. If the report shows signs of softer inflation, it could further cement the expectation of an extended Fed rate hike pause for this year. In such a scenario, gold prices could receive a fresh surge, possibly testing the $1,900 mark. However, if the US CPI data surprises with a hotter-than-expected print, it could offer temporary support to the US Dollar and trigger a pullback in gold prices.

The annual US CPI is expected to rise 3.6% in September, down slightly from the 3.7% increase recorded in August. Core CPI inflation is also anticipated to drop from 4.3% to 4.1% in the reported month. Nonetheless, there are concerns that these expectations may be overly optimistic, given the recent ISM survey data, which has shown signs of moderation in economic indicators.

Wednesday's US Producer Price Index (PPI) data revealed a 0.5% month-on-month increase, surpassing August's 0.7% acceleration. Over the past year, the PPI increased by 2.2%, up from 2.0% in August and surpassing the expected 1.6% rise.