Gold prices retreated on Thursday as a stronger US dollar and rising government bond yields outweighed earlier gains, with investors holding back ahead of key US inflation figures that could shape expectations for the Federal Reserve's interest-rate decisions.
Spot gold fell 0.4 per cent to $4,385.40 an ounce by 1125 GMT, while US gold futures declined 0.7 per cent to $4,427.80.
The precious metal's decline came as the US dollar strengthened, making gold and other commodities priced in the greenback more expensive for international buyers.
Fawad Razaqzada, a market analyst at Forex.com, said the combination of a stronger dollar and higher borrowing costs was weighing on precious metals.
“I think part of the drop in metals prices is to do with the U.S. dollar coming back, ahead of inflation data. And we are looking at even higher bond yields in the U.S. and elsewhere,” Razaqzada said.
Inflation data takes centre stage
Markets are now awaiting a series of US economic indicators that could provide fresh clues about the Federal Reserve's monetary-policy path.
The US producer price index (PPI) was due later on Thursday at 1230 GMT, followed by consumer price inflation data on Friday.
The figures are particularly important because investors are trying to determine whether recent increases in energy prices will feed into broader inflation and influence the Fed's approach to interest rates.
Higher interest rates and bond yields generally weigh on gold because the metal does not generate interest or other regular income. As yields on government bonds rise, investors face a higher opportunity cost when holding bullion instead of interest-bearing assets.
Treasury yields hit highest level since 2023
The pressure on gold has been compounded by a rise in global bond yields.
Benchmark 10-year US Treasury yields reached their highest level since 2023, as markets absorbed renewed concerns about inflation driven by higher energy prices.
A US Treasury programme aimed at buying back longer-dated government bonds also failed to provide the expected support to that part of the market, contributing to the rise in yields.
Razaqzada said the development reflected broader concerns about the health of the US bond market.
“Concerns about the bond market in the U.S. is growing with the long dated yields continuing to rise despite the Treasury buyback program.... that's kind of been a drop in the ocean,” he added.
The increase in longer-term yields presents a significant challenge for gold, particularly if investors begin to believe that inflation will remain elevated for longer.
Markets divided over Fed decision
Economists and financial markets remain divided over what the Federal Reserve will do at its upcoming policy meeting.
A majority of economists polled by Reuters expect the central bank to leave interest rates unchanged at its September 15-16 meeting and maintain them at that level for the remainder of the year.
Financial markets, however, are pricing in a different possibility. Traders were assigning roughly a 62 per cent probability of a rate hike next week, according to the CME FedWatch Tool.
The conflicting expectations mean the upcoming inflation figures could have an outsized impact on financial markets.
A stronger-than-expected inflation reading could reinforce the case for tighter monetary policy, potentially pushing bond yields and the dollar higher and putting further pressure on gold.
Conversely, softer inflation data could revive expectations for easier monetary policy and provide support for bullion.
Iran conflict keeps oil prices elevated
Geopolitical developments are adding another layer of uncertainty to the inflation outlook.
US President Donald Trump said he expected the war with Iran to end after the November US midterm elections, while again threatening to attack a site associated with Iran's nuclear programme.
The continuing conflict has helped keep energy markets on edge, with Brent crude prices remaining above $100 a barrel.
Higher oil prices have become a central concern for investors because a sustained increase in energy costs could feed into consumer and producer prices, potentially complicating the Federal Reserve's efforts to bring inflation under control.
For gold, the conflict presents a mixed picture. Geopolitical instability can increase demand for bullion as a traditional safe-haven asset, but the inflation and interest-rate consequences of higher oil prices can work in the opposite direction.
Silver and platinum also decline
Gold was not the only precious metal under pressure.
Spot silver fell 2.2 per cent to $65.75 an ounce, while platinum declined 3 per cent to $1,838.21.
Palladium also weakened, falling 2.3 per cent to $1,322 an ounce.
The broad decline across precious metals reflected the stronger dollar and rising yields, with investors increasingly focused on the inflation data and its potential implications for US monetary policy.
For gold traders, Friday's consumer inflation report will be particularly important. The data could determine whether the recent rise in yields and the dollar continues, or whether expectations of a less restrictive Federal Reserve return to the market.