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Silver fell almost 6% in dollar terms in a single day. Higher-than-expected inflation data from the US triggered the latest correction in precious metals. It has once again shifted expectations of an interest rate hike by the Fed (the US central bank). The Beige Book, an interim report by the Fed on the state of the US economy, also confirms the picture of higher inflation.
The silver price fell 5.4% in euros after the US inflation figures were released.
At 0.6% month-on-month, US inflation was in line with expectations, but at 3.7% year-on-year it came in slightly above the expected 3.6%. The shock came from core inflation, which excludes food and energy. Core inflation rose 0.3% instead of the expected 0.2%, and the increase was broad-based, from airfares to medical care. What this means is that there is a difference between inflation in fuel prices (temporarily higher due to the conflict in the Middle East) and inflation that is seeping through the entire economy. “This is broad-based strength and it will be harder for the Fed to look through,” says Meghan Swiber, US rates strategist at Bank of America.
US inflation, month-on-month change, is rising. Top left: all goods and services. Top right: everything excluding food and energy. Bottom left: gasoline prices. Bottom right: groceries. (Source: Bloomberg).
“Americans are seeing their pay totally wiped out by inflation,” Heather Long, chief economist at Navy Federal Credit Union, said in a note. “Meanwhile, the Federal Reserve isn’t seeing progress on inflation.” According to her, rising fuel prices are “starting to spill into other areas.”
Markets often look to the CME FedWatch tool to gauge how they view a possible rate hike by the Fed. Today it briefly jumped to a 55% probability of a rate hike, before falling back to 35% over the course of the day. Even so, markets are still pricing in a much higher probability of such a hike than before the data was released (around 20%). This tends to push the dollar higher, which is what happened, and the gold price lower.
Gold fell shortly after the release of the inflation figures (CPI data). Prices in dollars per troy ounce of gold. (Source: Bloomberg).
The inflation outlook is not helped by the renewed deterioration of the situation in the Middle East. On Tuesday, Houthi missiles fired by the Yemeni rebel movement hit the Aramco headquarters in Saudi Arabia. Aramco is the Saudi state oil company. In addition, four tankers were attacked in the Strait of Hormuz on Sunday, and Iranian attacks on shipping are increasing.
In orange, the areas of Yemen controlled by the Houthis. It shows how close the group is to the passage to the Red Sea. (Source: Bloomberg).
Sharp moves in precious metals sometimes reflect rapidly shifting market sentiment. Several analysts see strong support for gold around $4,000–4,100 per troy ounce. Meanwhile, Bank of America expects an average of $4,000 in the fourth quarter of this year, and $4,800 in 2027. Ole Hansen, Head of Commodity Strategy at Saxo Bank, calls a rate hike so close to the US midterm elections ‘highly controversial’.
The Fed’s next rate decision is due on 28 October (19:00 Dutch time), a date to keep an eye on. In addition, Fed Chair Kevin Warsh will speak on Friday morning at 05:30 Dutch time at the IMF Annual Meetings in Bangkok, where markets will be looking for hints about the upcoming rate decision.
Ole Hansen calls a Fed rate hike shortly before the elections ‘highly controversial’, given the political sensitivity surrounding monetary policy. (Source: X).
Meanwhile, in its weekly update the World Gold Council showed the term premium (the extra compensation investors demand for lending long-term) on 30-year government bonds of the UK, the US, France and Germany, which has been rising steadily since 2020. This brings fiscal concerns back to the fore, and it is against this backdrop that the WGC also sees the inflows into gold ETFs in recent months. As long as concerns about government debt persist, they seem to suggest, investors will continue to look to gold.
Term premiums on 30-year government bonds are rising steadily. (Source: World Gold Council).
