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Gold Benefits from Lower Market Interest Rates

Miguel A. Rodriguez
Miguel A. Rodriguez
12 October 2023

Gold was the star of the day yesterday as it gained $15 and is approaching the technical reference level around $1915. While waiting for the release of the US CPI today, investors bought government bonds, causing the market interest rate to decline and gold to benefit. 

Market interest rates continue to fall

Risk sentiment in the markets is picking up this week as US Treasury bond yields (market interest rates) continue to decline. This is due to bond buying in search of safe haven assets, brought about by the war in the Middle East. Dovish comments by Federal Reserve (Fed) officials this week are also a factor.  

Raphael Bostic, president of the Atlanta Fed, recently repeated these remarks when he said the central bank no longer needed to increase interest rates this year. On Wednesday, the 10-year Treasury yield fell further to 4.56%.  

Just a few days ago, the Fed signalled that another rate hike may be necessary this year to help tame persistently high inflation.

Confirmation about the end of rate hikes is expected from the US CPI data

It seems that the recent change in tone has removed the possibility of another rise. Even so, investors will seek confirmation that may come from the Consumer Price Index (CPI) which will be published today and will provide further indications of inflation. Data showing a drop in inflation levels may encourage investors to buy stocks.  

US PPI showed inflation rose by 2.2%

During the wait for the CPI data, investors are still digesting the release of the Producer Price Index (PPI) for September. The report that was released yesterday showed the index rose by 2.2%, more than the 1.6% expected for the year. It also showed a month-over-month increase of 0.5%, which exceeds the 0.3% expected. The core PPI rose 2.7% for the year - higher than the 2.3% expected - and rose 0.3% for the month - higher than the 0.2% expected.

Some not very encouraging numbers temporarily stopped the financial markets' ascent.

Gold gained $15

Investors' attention is still focused on the events in Israel, and information suggests the tension will only increase. The news, however, has not negatively affected risk assets at the moment. Instead, the flow of people buying government bonds as a form of safety is pushing market interest rates lower, which is currently seen as a positive development. Due to its status as a safe haven asset and the fact that market interest rates have fallen, gold has continued to profit from the scenario.

Yesterday gold gained $15 and is approaching the technical reference level around $1915.

Gold graph 12.10.2023.png

Gold monthly chart, October 12, 2023. Source: WebTrader.

Key Takeaways

  • Market interest rates continue to fall.
  • Conflict in the Middle East is causing bond buying.
  • Comments from Fed officials continue to suggest an end to interest rate hikes.
  • The 10-year Treasury yield fell to 4.56% on Wednesday.
  • US CPI data to be released today could confirm that the hike cycle is over for now.
  • US PPI showed that inflation rose by 2.2% in September.
  • The rise in inflation was more than the 1.6% expected.
  • Gold is benefiting and gained $15 yesterday.

Related Articles:

Sources: Bloomberg, Reuters 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.