Many people believe gold protects against rising prices. So when US inflation jumped on Wednesday, it seems odd that gold fell nearly 2% to a five-day low of $4,073 per ounce. The puzzle has a clear answer, and it helps explain much of what has happened to gold this year. This guide walks through the numbers and the reasoning.
What the inflation report showed
According to FXStreet, US consumer prices rose 3.7% in the year to September, up from 3.4% in August and above the 3.6% forecast. Core inflation, which leaves out food and energy, rose to 2.6% from 2.4%, above the 2.5% forecast. Mitrade says higher petrol, diesel and food prices drove the headline number, while housing costs, recreation, education and used cars pushed core inflation up.
That is a clear rise in the cost of living. By the usual logic, gold should have gained.
The missing link: interest rates
Markets do not respond to inflation alone. They respond to what central banks will do about it. When prices rise faster than expected, the Federal Reserve is more likely to raise interest rates to slow the economy. Higher rates make savings accounts and government bonds pay more. Gold pays nothing, so a rise in rates makes gold less attractive by comparison.
After the report, the probability of a Fed rate increase at the 27 to 28 October meeting jumped to between roughly 32% and 42%, depending on the source, from about 22% the day before. The chance of an increase in December rose to nearly 90%. Short-term bond yields climbed as well, with the 2-year Treasury yield reaching 4.829%.
So gold reacted to the Fed, not to inflation itself
In the short run, the expected policy response overwhelms the inflation signal. In the long run, gold tends to hold its value when inflation stays high for years, because it cannot be printed or devalued by policy. That long-run property is real, but it does not stop the price from dropping on days when interest rate expectations rise.
There was also a technical factor. TD Securities noted that trend-following funds, which trade on price momentum, have turned heavy sellers of gold. Gold has struggled to hold above $4,200 and trades below its 100-day average near $4,248, which triggers selling by these funds.
The rebound on Thursday
Gold recovered on Thursday and traded toward $4,150, ending a three-day losing streak. FXStreet explained that US bond yields and the dollar retreated from their post-inflation highs, which helped. San Francisco Fed President Mary Daly said further hikes will probably be needed but none is required in October. That remark suggested the Fed is not in a rush, and it allowed buyers to return.
A quick example with numbers
Imagine a savings account that pays 4% and a gold bar that pays nothing. If the bank raises its rate to 4.5%, the gap between the two options widens, and some savers move money from gold into the account. Multiply that decision across thousands of funds and institutions, and you get a visible price drop on the day rates are expected to rise. The same logic works in reverse. If rate expectations fall, the account looks less appealing and gold becomes easier to hold. This is why traders read every comment from a Fed official as a clue about where gold may go next.
It also explains why two people can look at the same inflation figure and expect different gold prices. One focuses on the rising cost of living and expects demand for gold as protection. The other focuses on the Fed's likely response and expects pressure on the price. Over short periods the second view usually wins. Over several years the first view has tended to matter more.
Where the price could go
Analysts see support around $4,100, then $4,075 to $4,065, and then $4,050 and $4,000. The yearly low is $3,941. TD Securities expects steady buying to support gold between $4,000 and $4,100. Bank of America expects gold to average $4,000 in the fourth quarter. On the upside, $4,200 to $4,220 is the first hurdle.
US producer prices are due on Thursday, and Fed Chair Kevin Warsh speaks on Friday in Bangkok. Both events could move the price. The Fed's October meeting follows on 27 to 28 October.
What this means if you are buying gold jewellery
If you are buying jewellery to wear or to give, the daily moves matter much less than the quality of what you buy. Check the purity mark and weight on the receipt. Compare the price per gram with the live price, which you can follow on Trading Economics. Ask how the workmanship charge is set, since it sits on top of the gold value. Ask whether the shop offers exchange or buyback terms.
Gold is now about 27% below its January record of $5,598.58, which some buyers see as a more comfortable entry point, while others prefer to wait for the price to settle. Lightweight pieces contain less gold, so market swings change their price by a smaller amount than for heavy chains. You can follow the live gold price on Trading Economics.
The lesson from this week is that the gold price depends on expectations about interest rates at least as much as on inflation itself. Once that link is clear, headlines that look contradictory start to make sense.
Starlight Jewellery offers a wide range of lightweight gold rings, with Buy Now Pay Later options available. Browse the collection at starlightjewellery.com.sg.