Gold Drops Below $4,000 Again. Will Friday’s Inflation Data Deepen the Slide?

The gold price fell to $3,963.44 on Thursday, slipping back below $4,000 for the third time since late October. Hotter October inflation has pushed traders to fully price in a December Federal Reserve (Fed) hike.

A quarter-point move is already in the price. Friday’s Producer Price Index (PPI) report could shape whether bets on a half-point hike grow and drag gold lower.

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Higher Yields Have Gold on Edge Before Friday

October’s Consumer Price Index (CPI) rose 0.4% on the month, above the 0.23% forecast. The odds of a half-point Fed rate hike have jumped to 11.2%, up from zero a week ago.

Two-year Treasury yields have climbed 25 basis points this week. Meanwhile, the US dollar gauge rose to a 19-month high. Both moves weigh on gold, which pays no interest and becomes costlier for most buyers when the dollar strengthens.

The last 2 PPI releases moved gold in opposite directions. On September 10, the August producer price report matched monthly forecasts, but its annual rate came in hotter. Gold fell 1.39% on the day as yields rose.

On October 15, September producer prices jumped 1.3%, more than double the 0.6% forecast. Yet gold gained about 1% on the day as the 10-year yield fell during a tech-led stock selloff. In both cases, gold moved opposite to Treasury yields, regardless of how hot the PPI print was.

Economists expect October PPI to rise 0.4% on the month, down from 1.3% in September. 

Oversea-Chinese Banking Corp. strategist Christopher Wong sees gold possibly falling toward $3,870, near its late-October low. He warned that a PPI reading above forecasts could deepen gold’s recent slide.

Central Banks Keep Buying as US Funds Sell

Gold exchange-traded fund (ETF) flows from October show where the selling came from. North America was the only region with outflows, losing $512 million, World Gold Council (WGC) data shows.

Global gold ETFs still added $2.7 billion, their fourth straight month of inflows. European funds led with $1.8 billion, while Asian funds brought in $1.3 billion.

Central bank buying has also held up. China’s central bank added 25.8 tonnes in October, its 24th straight monthly purchase and the largest of the streak. Globally, central banks bought 321 tonnes in the third quarter, up 42% year on year, according to the WGC.

StoneX strategist Bob Haberkorn told Reuters that third-quarter central bank buying has put a floor under gold prices. He said that support has held even as the Fed and interest rates work against the metal.

A hot PPI report that lifts yields again could add to selling in North American gold funds. China, in contrast, has stepped up its purchases as prices fell. 

Friday’s data and the Fed’s December 9 decision will test whether official buying can keep cushioning gold’s losses.

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