Futures & Commodities

Gold retreats over 1% on expectations for early Fed rate hike

Key Points
  • Palladium leads slide, hits lowest since March 2020
  • Other major central banks also set to meet this week
  • Producer price index for final demand jumped 0.8% last month
Close up image of assorted gold ingots and gold coins.
Anthony Bradshaw | Getty Images

Gold fell more than 1% on Tuesday after a jump in U.S. producer prices fuelled expectations for sooner-than-expected interest rate hikes ahead of the Federal Reserve's two-day meeting.

Spot gold fell 0.9% to $1,771.66 per ounce by 01:40 p.m. ET (1840 GMT). U.S. gold futures settled down 0.9% at $1,772.30.

U.S. producer prices increased more than expected in November as supply constraints persisted, supporting views that inflation could remain uncomfortably high for some time.

"Producer prices were higher than expected, indicating continued inflation, and gold is viewed as an inflation hedge. But in reality, we're seeing the opposite where hot inflation could mean faster interest rate hikes," said David Meger, director of metals trading at High Ridge Futures.

"This is why inflation is called a double-edged sword."

Interest rate hikes tend to push government bond yields up, raising the opportunity cost of holding non-yielding bullion.

"Market participants will closely track the upcoming Federal Open Market Committee meeting to see how the central bank reacts on elevated inflation, which will result in likely larger price moves," said UBS analyst Giovanni Staunovo.

The Fed will begin its two-day monetary policy meeting later in the day. It is expected to announce that it is wrapping up bond buying stimulus sooner than previously communicated, potentially setting up earlier interest rate hikes next year.

"Should the Fed step up the gear on tapering, this is likely to punish gold prices as the dollar appreciates, yields rise and rate hike expectations jump," FXTM analyst Lukman Otunuga said in a note.

The European Central Bank, the Bank of England and the Bank of Japan have also scheduled meetings this week.

Spot silver fell 1.9% to $21.89 an ounce. Platinum lost 1.2% to $918.45, while palladium dipped 3.3% to $1,626.85, after hitting its lowest since March 2020 at $1,579.01.