Gold drops as dollar, yields firm after US inflation report

Gold slipped 1% on Friday as the dollar and Treasury yields firmed after US inflation data matched expectations, but the bullion is set for a monthly gain as a September interest rate cut by the Federal Reserve remains in play.

Spot gold fell 0.9% to USD 2,497.53 per ounce as of 01:42 p.m. ET (1742 GMT) and US gold futures settled 1.3% lower at USD 2,527.6.

Bullion gained 2% this month after prices rallied to an all-time high of USD 2,531.60 on Aug. 20.

Data earlier in the day from the Commerce Department showed the personal consumption expenditures (PCE) price index rose 0.2% last month, matching economists’ forecasts.

The PCE data confirms inflation is no longer the Fed’s main concern, as they have shifted their focus to unemployment, which further validates the potential rate cuts in September, said Alex Ebkarian, chief operating officer at Allegiance Gold.

Investors now look ahead to the US non-farm payroll report due next week.

“Next week will solidify whether or not we have a 50- or 25-basis-point interest rate cut at the September meeting,” said Phillip Streible, chief market strategist at Blue Line Futures.

Traders slightly raised bets of a 25-basis-point rate reduction by the Fed next month to 69%, with a 50-bps cut possibility coming down to 31% following the inflation report, according to the CME FedWatch tool.

Physical demand remained lackluster is top Asian consumers as new import quotas failed to lift Chinese demand.

“Systematic trend followers are effectively max-long. We also think that Shanghai positioning is near its record highs. That is despite the fact that physical demand in China has been fairly weak and inflows from Chinese gold ETFs as well,” said Daniel Ghali, commodity strategist at TD Securities.

Downside risks are significantly more elevated in the near term, given the fact that positioning looks extremely stretched, Ghali said.

Spot silver eased 2.2% to USD 28.78 per ounce and platinum fell 1.2% to USD 926.65. Both the metals registered monthly losses.

Palladium retreated 1.7% to USD 963.34, but posted a 4.3% monthly gain.

(Reporting by Anushree Mukherjee and Swati Verma in Bengaluru; Editing by Krishna Chandra Eluri and Shreya Biswas)