Gold Sells the Soft PCE Report as Surging Yields Overpower Falling Rate Hike Odds

Gold gave back its post-inflation rally today, with futures settling at $4,186.70, a gain of just 0.2% that hides a sharp intraday reversal. The catalyst was the August PCE report, which came in below expectations. Core PCE held at 3.0% year over year against forecasts of 3.3%, while headline PCE printed 3.4% against forecasts of 3.7%. The Bureau of Economic Analysis also reported that prices rose 0.3% on the month after a downward revised 0.1% gain in July. Gold futures, which had climbed above $4,200 overnight, jumped on the release, and spot gold reached $4,219, but buyers could not hold it. By early afternoon spot had been sold back to $4,153, down 0.7% on the day, and futures handed back their overnight gains.

The rate hike odds did exactly what the data suggested they should. The CME FedWatch Tool now shows a 38.2% chance of a 25 basis point hike at the October 27-28 meeting, down from 50.9% yesterday and 70.9% a week ago, with a 61.8% chance the Fed holds at 3.75%-4.00%. Normally that is a favorable setup for a metal that pays no yield.

Treasury yields surged into the afternoon, with the 10-year up about 7 basis points to 5.30% and the 30-year up 8 basis points to 5.647%. The dollar index dipped to 101.02 after the data, then reclaimed 101.30 and turned positive. Stronger data also undercut the soft-inflation story, as second-quarter GDP was revised up to 2.2% against forecasts of 1.5%, and ADP private payrolls came in at 90,000 against forecasts of 70,000. Markets still see about a 90% chance of a December hike, and Fed Governor Lisa Cook said inflation has stayed too high for too long. 

Crude oil added to the confusion. Brent slipped toward $97 early in the session, according to Kitco, as Gulf exports recovered, which put it below the $100 level we flagged on Monday. That should have been a tailwind for gold. But energy reversed higher later in the day as US-Iran talks stalled, and oil remains on track for a big monthly gain, however WTI crude oil futures are on track for their third consecutive weekly decline. This is why today’s small bump doesn’t suggest the current shorter-term bearish trend has pivoted to a bullish one.

Technically, the Fibonacci retracement is still overlaid from the lows around $4,015 to the August highs at $4,755. Today’s settlement leaves gold just above the 78.6% level at $4,174, the support it lost on Monday, which is a small positive. The bigger read is that gold got the news bulls wanted and still could not hold the spike.

Silver was weaker again, with spot down 2.1% to about $60.18 after stalling near $61.73 following the PCE release. Both metals are headed for monthly losses, with gold futures losing 6.85% for the month of September, but are still on track for quarterly gains.

The next test is Friday’s September nonfarm payrolls report, the last major data point before the October 27-28 FOMC meeting. After today’s upside surprises in GDP and ADP, a strong jobs number could quickly erase the drop in hike odds, while a soft one would be the first real chance for gold to build on today’s PCE reaction. China’s Golden Week also begins tomorrow, which may thin out Asian liquidity. For now, $4,174 is the level to hold and $4,298 is the level to reclaim. Keep in mind until it does gold is and has been deeply entrenched in a bullish pattern since all-time highs were reached earlier this year.

Wishing you, as always, good trading.