Gold Bulls Stage a Dramatic Comeback: This Week’s U.S. CPI Data and Fed Chair’s Remarks Will Be Key!

Gold prices briefly fell to a two-month low last week before bargain hunters stepped in, pushing spot gold back to a one-week high. Overall, gold is undergoing a volatile recovery above the psychological $4,000 level, with bulls and bears locked in an intense tug-of-war over the Federal Reserve’s rate-hike path, dollar strength, U.S. Treasury yields and geopolitical risks. A bottom is gradually forming around $4,000. The market has already priced in expectations of further Fed rate hikes, as well as continued net purchases by official institutions. Barring a black swan event, gold is unlikely to deliver a convincing upside breakout.

Gold currently has support from physical demand and central bank purchases, while interest rate expectations and a strong dollar are capping its upside. Last Friday’s rebound was driven more by a combination of short covering and buying on dips than by a signal of a sustained breakout.

The biggest obstacle to gold’s current rebound remains the Federal Reserve and the bond market. According to the CME FedWatch tool, investors currently see an 18% probability of a Fed rate hike in October and an 84% probability of at least 25 basis points of rate increases by the end of December. In a high-interest-rate environment, gold is often less attractive than yield-bearing assets, which was also a major reason for the earlier pressure on gold prices.

This week’s Consumer Price Index and retail sales data could trigger the next sharp move in gold prices. If stubborn inflation forces the Fed onto a steeper rate-hike path, spot gold could retest the psychological support level of $4,000. September’s core CPI inflation rate may ease as the temporary impact of rising wireless communications service prices fades. Given that the Fed has no urgent need to raise rates at consecutive meetings and the midterm elections are approaching, the inflation forecast is unlikely to increase the probability of an October rate hike.

University of Michigan data show that consumers’ one-year inflation expectations rose from 4.6% in September to 4.7% in October, well above the 3.4% recorded before the Iran war broke out in February. Consumer sentiment fell further to 46.3 in early October, compared with 48.1 in September.

Market Insight:

The $4,000 level is evolving from a purely psychological threshold into a repeatedly tested bottoming zone. However, without an extreme event or inflation and employment data that significantly alter the Fed’s policy path, gold is unlikely to achieve a convincing upside breakout. Upcoming CPI and PPI data will offer clues about Fed policy, while developments in the Strait of Hormuz could ignite safe-haven demand at any moment. Gold’s battle to defend $4,000 is far from over, and the next major price swing may emerge where this week’s economic data and geopolitical news intersect.