Why is gold plunging towards $4,000 as hot US inflation drives Treasury yields above 5%?

Gold sees a sharp sell-off after retreating from its daily high of $4,146.
Expectations of additional Fed tightening strengthen as US Core CPI increases 0.3% MoM.
A 12-basis-point jump takes the US 10-year Treasury yield to 5.012%.

Gold (XAU/USD) faces heavy selling in Tuesday’s North American session, with hawkish Federal Reserve (Fed) officials anticipating additional tightening after a hot United States (US) inflation report. Having reached a peak near $4,146, XAU/USD is trading at $4,021 at the time of writing, a decline of nearly 3%.

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Can Gold find support after a near-3% slide on hawkish Fed comments and sticky US inflation?

Signs of stalled disinflation emerged from October’s US Consumer Price Index (CPI) report. Headline CPI increased 0.4% MoM, easing from 0.6% but overshooting the 0.3% forecast. Excluding volatile items, Core CPI generally offers a clearer picture of inflation. It rose 0.3% MoM, matching September’s reading and exceeding expectations of 0.2%.

Before the release, Fed Governor Christopher Waller had indicated that he would favour a 25-basis-point hike if core CPI pointed to improving inflation. A reading of 0.3%, however, would lead him to support a 50-basis-point increase. He added: “Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take.”

Some of Waller’s views were shared by Dallas Fed President Lorie Logan, who said that “more rapid rate hikes possibly needed this winter,” and added that the Fed remained 50 basis points short of a “modestly restrictive level.”

According to the CME FedWatch Tool, money markets assign a 10% probability to a 50-basis-point rate hike in December, while a 25-basis-point increase is fully priced in.

Against this backdrop, bullion suffered a steep decline as the US Dollar Index (DXY) climbed nearly 0.70% to 102.36. The index measures the US currency against six currencies. Treasury yields also jumped, with the US 10-year T-note yield gaining 12 basis points to 5.012%, as investors became increasingly convinced that a December Fed rate hike was assured.

Meanwhile, oil prices are largely flat despite mounting speculation over a possible ceasefire agreement between Washington and Tehran. Such a deal could bring an end to the conflict that began towards the end of February.

Following the US Veterans Day holiday, the economic calendar picks up on Thursday. Traders will focus on jobless claims, housing figures and remarks from Fed officials.

XAU/USD technical outlook: Will Gold extend losses as $4,000 comes into focus?

Selling pressure has pushed Gold to a four-day low of $4,015 against the prevailing fundamental backdrop, with sellers targeting a decisive break beneath the psychological $4,000 mark. The Relative Strength Index (RSI) points to a bearish shift in momentum, signalling scope for additional losses.

A sustained bearish move requires Gold to fall below $4,000. If that happens, the November 4 daily low of $3,919 is a likely downside target, followed by the October 30 year-to-date low of $3,870.

Alternatively, a move back above $4,050 by Gold buyers would bring $4,100 into focus. Clearing that level could pave the way for a recovery towards the next key resistance zone: the confluence of the 50- and 100-day Simple Moving Averages (SMAs), at $4,185 and $4,200, respectively.

Gold: Common questions answered

What attracts investors to Gold?

Throughout human history, Gold has served extensively as both a store of value and a medium of exchange, giving it an important role. Beyond its lustre and use in jewellery, the precious metal is now widely regarded as a safe-haven asset, or an investment considered attractive during periods of turmoil. Its independence from any particular issuer or government also underpins its widespread use as a hedge against inflation and currency depreciation.

Which buyers hold the most Gold?

The largest holders of Gold are central banks. To support their currencies during turbulent periods, they typically diversify their reserves and purchase Gold, reinforcing perceptions of economic and currency strength. Substantial Gold holdings can bolster confidence in a country’s solvency. World Gold Council data show that central banks increased their reserves by 1,136 tonnes of Gold in 2022, worth around $70 billion. This marked the largest annual purchase since records began. Emerging-economy central banks, including those in China, India and Turkey, are rapidly expanding their Gold reserves.

How does Gold move in relation to other assets?

The US Dollar and US Treasuries, both key reserve and safe-haven assets, have an inverse relationship with Gold. A weaker Dollar typically supports Gold, allowing investors and central banks to diversify their holdings during unsettled periods. Gold also tends to move in the opposite direction to risk assets. Stock market gains generally weigh on the metal, whereas selling in riskier markets tends to support it.

Which factors drive Gold prices?

Several influences can drive changes in Gold prices. Its safe-haven appeal means geopolitical instability or concerns about a severe recession can trigger a rapid price rise. Since Gold offers no yield, lower interest rates generally support it, while a higher cost of money tends to weigh on the metal. Nevertheless, the behaviour of the US Dollar (USD) accounts for most price movements because Gold is quoted in dollars (XAU/USD). Dollar strength typically restrains Gold prices, while a weaker Dollar is likely to lift them.