Gold slumps as faster US inflation stokes Fed rate hike wagers

Gold prices plummeted as the US reported a surge in consumer inflation, sparking speculation that the Federal Reserve would need to hike interest rates more aggressively. September's Consumer Price Index rose by 0.6% month-over-month and 3.7% year-on-year, driven by higher fuel costs. This surge in prices reignited concerns that the Fed would have to raise rates further to curb inflation, which is a headwind for non-yielding assets like gold.

Meanwhile, a spike in Middle East tensions had also heightened worries about potential disruptions to energy supplies, further pushing inflation higher. Silver, platinum, and palladium saw sharp declines, while the US dollar rallied. Copper, a key industrial metal, also fell due to the US dollar's strength and the expectation of higher borrowing costs.

The Federal Reserve, in response to the rising prices, increased interest rates for the first time since 2023 in September. Since then, officials have indicated they will carefully assess incoming data before taking further action. The median forecast among officials still expects another rate hike in 2026.

The uptick in consumer prices had already triggered a drop in Treasury yields, but this was tempered when expectations of additional Fed rate hikes increased, sending US equities lower. Traders will now be closely watching September's producer prices data and Fed Chair Kevin Warsh's remarks during a fireside chat with IMF Managing Director Kristalina Georgieva in Bangkok.

Gold prices have been hovering near the $4,000 an ounce level, a key support level reached in September, based on softer inflation data. However, further Middle East oil supply disruptions could drive inflation up and push gold prices below $3,900 an ounce.