Inflation Shock Pummels Gold as Rate Expectations Soar

Yesterday's hotter-than-expected U.S. inflation data pushed Treasury yields and Federal Reserve rate-hike expectations higher, sending gold prices plummeting by over 1% to $4,358 an ounce.

The August producer price index rose 0.4% month-over-month and 5.4% year-over-year, slightly above the 5.3% annual consensus. The sharp contrast with record institutional demand for bullion was driven largely by rising rates: the 10-year Treasury yield moved around 4.9%, while markets raised the probability of a September Fed hike to roughly 70%, up from around 62% before the PPI release.

Despite this, gold's decline is notable because institutional demand had just delivered one of its strongest months on record, with global gold ETFs attracting $18 billion in August, their second-largest monthly inflow ever. The World Gold Council reported that holdings increased by 121 tonnes to a record 4,189 tonnes, while assets under management jumped 16% to $615 billion.

Bitcoin also weakened as investors moved away from non-yielding assets, reinforcing a growing short-term relationship between the two assets. With neither producing yield, when Treasury rates climb toward 5%, government bonds become more attractive relative to both assets.