Gold Prices Surge on Softer Inflation Data and Repricing of Rate Expectations
The Federal Reserve's decision to hold rates steady on July 29 was followed by two pieces of inflation data that came in softer than expected. The Consumer Price Index rose 3.4% year-over-year in July, down from 3.5% in June, and the Producer Price Index for final demand came in unchanged month-over-month in July. These results have given the hold majority a defensible data record heading into September.
The gold price has responded accordingly, trading near $4,383 an ounce, up roughly $33 on the day, with silver standing near $65.05 an ounce, up approximately $0.57. Gold has posted a monthly gain exceeding 10%, its strongest August run in several years, driven almost entirely by the repricing of September rate expectations.
The catalyst behind this gold price move is the real-yield equation. When markets expect fewer rate hikes, they also expect real yields to remain compressed. Real yields are the nominal interest rate minus inflation expectations. Consequently, the opportunity cost of holding gold, which pays no interest, falls. Gold tends to reprice $40 to $60 per ounce for every 25 basis points of real yield compression.
The Federal Reserve releases the minutes from its July 29 meeting on Tuesday, August 19 at 2:00 p.m. ET. The vote was 9-to-3, and the detailed language of the three dissenters has not yet been made public. If the minutes show the dissenting trio used conditional language, signaling they would support a hike only if the next inflation print showed renewed acceleration, the September hold case strengthens further.