Fed Rate Hike Expectations Weigh on Gold Price Outlook

The Federal Reserve's rate hike expectations have become a major obstacle to gold prices. The August jobs report showed that US non-farm payrolls increased by 162,000 in August, while unemployment held at 4.1%. This has strengthened the case for another Federal Reserve rate increase, with markets now assigning a close to 86% probability to a 25-basis-point Fed hike at the September 15-16 meeting.

The rise in producer prices and inflation adds another complication to the gold market. Producer prices rose 0.4% in August and 5.4% year on year, while August CPI also accelerated 0.4% month on month. Energy costs were a major contributor to both reports.

The structural drivers of the gold market have not disappeared. The World Gold Council attributed the recent ETF surge to concerns around currency intervention, fiscal sustainability, Treasury-market stress and strong price momentum. Asian demand is particularly important here, with Asian-listed funds attracting about $2 billion in August, their strongest month since February.