Gold price down 4% as investors panic, dollar rallies after feds nod inflation risks [View all]

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Gold dropped sharply and the dollar rose Thursday after the Federal Reserve signaled it may raise interest rates sooner than expected. Gold futures declined 4.5%, the largest drop in over 10 months. That took gold down to $1,777.80 a troy ounce, its lowest since early May. The WSJ Dollar Index, which tracks the currency against a basket of others, advanced 0.3%. That added to its 0.8% gain on Wednesday, which was its biggest one-day gain since March 2020. Against the euro, the dollar rose another 0.5% Thursday, putting at about $1.19 per euro.

Fed Chairman Jerome Powell Wednesday said the higher inflation recorded this year should be temporary, but the risks that it would persist couldn’t be ignored. Some members of the rate-setting committee brought forward their expectations of when rates might have to rise. Higher interest rates in the U.S. make investing in American bonds more attractive to foreigners, and can increase demand for the dollar from overseas. Treasury yields rallied their most in three months after the Fed’s disclosures Wednesday, helping bolster appetite for the dollar. Those higher yields also make gold less attractive as an investment because it produces no income.

“Contrary to popular belief that high inflation leads to high gold prices, gold would only benefit massively if inflation goes above 4%,” said Bernard Dahdah, senior commodities analyst at Natixis. “It is no longer the Covid story that is influencing gold, it is the recovery story, and the main concern is the Fed raising rates.”

Many investors have viewed the dollar as likely to continue weakening for much of the past year due to expectations that a broad, global recovery will take hold and boost markets in many countries.

https://www.wsj.com/articles/gold-price-drops-dollar-rallies-after-fed-nods-at-inflation-risks-11623936699