(Kitco News) - Hotter-than-expected consumer prices have put an October rate hike back in play, pushing real bond yields higher and dragging gold prices below a critical near-term support level.
However, commodity analysts expect support to continue to hold at $4,000 an ounce, as the Federal Reserve is unlikely to raise interest rates just one week before American voters head to the polls for the 2026 midterm elections.
In a note Wednesday, Ryan McKay, Director of Commodity Strategy at TD Securities, noted that gold’s inability to break through resistance at $4,200 has prompted speculative fund managers to liquidate their long positions, while the disappointing inflation numbers have added fuel to the fire.
“This systematic selling remains the one corner of the precious metals market that continues to be a notable drag on the yellow metal,” he said.
However, he added that other pillars of the gold market remain strong and should continue to provide critical support at $4,000 an ounce, which has become an important technical pivot level.
“Beyond near-term hike pricing and systematic selling, macro discretionary positions remain elevated, while ETF inflows and central bank demand also remain strong. These flows have ultimately offered strong support for gold, and we expect these flows will remain robust, especially in the $4,000-4,100/oz region,” he said.
Economists and analysts note that the key question for markets is whether inflation is bad enough to force the Federal Reserve to raise interest rates later this month. Traditionally, in an attempt to avoid the appearance of political bias, the Federal Reserve has refrained from changing interest rates immediately before elections.
However, with the headline Consumer Price Index rising 3.6% over the 12 months through September, markets are once again shifting their expectations. According to the CME FedWatch Tool, markets see a nearly 44% chance of a rate hike this month. Ahead of the CPI report, markets were pricing in only a 21% chance of a hawkish move.
Fixed-income analysts at TD Securities do not expect the Federal Reserve to raise interest rates later this month; however, that does not mean gold will see a sharp recovery anytime soon.
The Canadian bank expects interest rates to remain higher for longer because of persistent inflationary pressures.
“While we don't expect an October hike despite a sharp increase in pricing, the stronger data hints at the risk of more hikes in the coming months, maintaining upward pressure on rates,” the analysts said.
Economists note that a rise in core inflation is complicating the economic outlook. They explained that it is not just higher energy prices temporarily driving consumer prices higher. Inflationary pressures are becoming embedded in the broader economy.
“Inflation pressures are broadening beyond energy, suggesting the last mile back to target could remain bumpy and keep interest rates elevated. The latest report complicates the Fed’s decision this month, as the road back to price stability is looking increasingly difficult to navigate,” said Jeffrey Roach, Chief Economist at LPL Financial, in a note Wednesday.
Alex Kuptsikevich, Chief Market Analyst at FxPro, said he expects gold prices to remain stuck between support at $4,050 and resistance at $4,200 an ounce.
“High oil prices, Treasury bond yields and a strong dollar are putting pressure on the precious metal. At the same time, strong investment demand and central bank purchases of bullion are preventing it from collapsing,” he said.
However, he added that investors need to pay attention to comments from Federal Reserve Chair Kevin Warsh during Thursday’s overnight session, when he is scheduled to participate in a fireside chat as part of the annual meetings of the International Monetary Fund and World Bank Group in Bangkok.
“Against the backdrop of accelerating CPI, hawkish rhetoric from the Fed Chair could push prices below $4,000,” said Kuptsikevich.
In a social media post, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said he does not expect the U.S. central bank to raise interest rates in October; however, he added that the committee has a narrow path to navigate.
“With inflation showing renewed signs of persistence, the Fed may increasingly find itself caught between defending its inflation-fighting credibility and avoiding accusations of political interference. For gold, the immediate challenge remains the combination of rising real yields, a stronger dollar and the prospect of tighter monetary policy, even as longer-term investment demand continues to provide underlying support,” he said.
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