Gold faces weekly rout as high US yields fuel Fed rate hike bets

Gold (XAU/USD) appears headed for a weekly decline, falling nearly 4.50%, although it slightly gained 0.14% on Friday as the US Dollar (USD) steadied its rise after a strong US inflation report. Currently trading around $3,879, XAU/USD is near 13-month lows. This week's surge in US inflation data has increased the likelihood of the Federal Reserve (Fed) raising interest rates during the December meeting.

Producer Price Index (PPI) for October came in at 6.5% YoY, exceeding predictions, driven by increased transportation and warehousing costs. Core PPI remained steady at 5%, matching forecasts. The US Consumer Price Index (CPI) report on Tuesday fueled discussions among Fed officials about potential rate increases, with many predicting higher interest rates and noting that financial conditions are not restrictive.

San Francisco Fed Mary Daly anticipates more rate hikes as companies pass on higher costs, while Boston Fed Susan Collins warns of spreading inflation requiring additional rate increases. Chicago Fed Austan Goolsbee noted that worsening inflation data could prompt a more aggressive Fed. US Treasury yields climbed throughout the week, suggesting market participants expect higher rates.

The 10-year Treasury yield rose to 5.15%, aiding the US Dollar. The US Dollar Index (DXY), which gauges the dollar's performance against six peers, rose 0.23% to 103.41, after touching a 19-month high of 103.42. CME FedWatch anticipates a 90% probability of a 25-basis-point Fed hike in December and a 10% chance of a 50-basis-point increase.

In the coming week, traders will focus on the release of the Federal Open Market Committee meeting minutes, Retail Sales data, and Fed officials' speeches. After its weekly drop, gold seems to have hit its lowest point near $3,873, slightly above the day's low of $3,867. A breach could expose the $3,800 psychological level and the April 22, 2025, swing high-turned-support at $3,500.

If XAU/USD breaches $3,900, a move towards Thursday's high of $4,000 is possible, followed by $4,100. The next target is $4,100, before reaching the 50-day SMA at $4,154 and the 100-day SMA at $4,196. Gold, a long-standing store of value and medium of exchange, is now seen as a safe-haven asset during turbulent times. Central banks, particularly from emerging economies like China, India, and Turkey, have been accumulating significant gold reserves.

Gold is inversely correlated with the US Dollar and US Treasuries, rising when the dollar depreciates and falling with rising interest rates. Geopolitical instability, fears of a deep recession, and a weaker dollar can all boost gold prices, while a strong dollar tends to keep gold prices in check.