Gold Prices Slip After Stronger US Inflation Data, Fed President Comments on Dollar Rate Hikes

GOLD PRICES tracked lower to $1272 per ounce on Wednesday morning in London, while markets waited for US central bank the Federal Reserve's latest FOMC meeting minutes to be released, writes Steffen Grosshauser at BullionVault.

Yesterday's stronger US economic data were followed by comments from both the Atlanta and San Francisco Fed presidents that at least two interest-rate increases may be warranted this year. A third Fed official said that he would push for an interest hike as early as June when officials meet next month.

The US consumer price index (CPI) accelerated by 0.4% in April and showed its biggest increase in more than three years, according to data published by the Department of Labor on Tuesday.

Petrol prices and rents also rose while new housing starts and industrial production recovered by 6.6% and 0.7% respectively, seen by several market observers as indications of a steady inflation build-up.

Gold dropped around 0.5% from $1280 following this news. The yellow metal has rallied around 20% so far this year, as interest rates on government bonds fell, reducing the opportunity cost of holding non-yielding gold bullion.

"The prices have slipped slightly today...that is partly due to speculation or increased bets that the Fed will be listing higher rates this year," said Vyanne Lai, analyst at National Australia Bank.    

"Expectations appear to be that minutes will signal that a summer hike is on the cards," agrees currency strategist Stuart Bennett at the Spanish banking group Santander.

The Dollar index, which measures the US Dollar against a basket of six major currencies, climbed 0.3% to 94.83.

Brent crude oil was up slightly to $49.35 per barrel with futures contracts trading at a 6-month high as new wildfire warnings threatened Canada’s oil supplies.

Silver tracked and extended the fall in gold prices, dropping around 1.3% from Tuesday's highs to $17.06 per ounce.

"We have got several risks, so when you start adding them up, it could be that additional risks will sway some investors to add exposure to gold or maybe revisit gold," reckons Denmark's Saxo Bank head of commodity strategy Ole Hansen, who predicts gold jumping to $1400 per ounce again this year, not least on the risk of a possible 'Brexit' vote in the UK's referendum on European Union membership next month.

The world's largest gold-backed exchange traded fund, the SPDR Gold Trust (NYSE Arca: GLD), swelled again on Tuesday, increasing by 0.6% to almost 856 tonnes - the highest level since November 2013.