Spot gold up 1% amid muted dollar, elevated oil prices, and a slide in U.S. bonds

Gold prices climbed on Wednesday, but gains were subdued as traders digested a combination of elevated oil prices, a slide in Treasury bonds, and a muted dollar. Traders also geared up for key inflation data over the next two days that could cement Federal Reserve rate hike expectations.

At 15:58 ET (19:58 GMT), spot gold had added 1% to $4,399.14/oz, while gold futures ticked up 0.1% to $4,444.20/oz.
Bonds under pressure ahead of U.S. inflation updates
The U.S. fixed-income market was in the spotlight on Wednesday, with yields surging as bonds were dumped after the Treasury Department said it would buy back up to $6 billion in 10-year to 20-year maturities, up from $2 billion previously. The department last month said it would increase the buyback sizes to at least $4 billion, while media reports said the expectations had been for at least $10 billion.

The benchmark U.S. 10-year yield was now up 3.8 basis points to 4.842%. It had been up 1.2 basis points to 4.816% before the announcement. The shorter-end, more rate-sensitive 2-year yield was now up 2.7 basis points to 4.425%. Higher rate environments tend to generally weigh on non-yielding assets such as bullion. They also tend to strengthen the dollar, which in turn can make gold more expensive for foreign buyers.

The Treasury’s move had been seen as surprise intervention action to cap a surge in yields amid a sustained rout in government debt.

The sell-off had been driven by a combination of factors including inflationary concerns due to soaring oil prices, jitters over the massive amount of debt being issued by companies to fund their artificial intelligence infrastructure buildouts, and worries over ballooning U.S. national debt.

All eyes are now on Thursday’s August producer price index (PPI) report and Friday’s consumer price index (CPI) data for further cues on rates. Hotter-than-anticipated readings could decisively tilt odds towards a Fed hike next week.

“Gold, and silver for that matter, have shown a strong inverse correlation to the U.S. dollar ever since both metals plunged in early February after surging to all-time highs at the end of January,” David Morrison, senior market analyst at Trade Nation, said.

“But it is worth considering that correlations, positive and negative, invariably break down. Although these ones have held for over seven months. The big test for precious metals, and the dollar, looks likely to come over the next two days. There’s an update on U.S. wholesale inflation tomorrow, with CPI following on Friday,” he added.

Brent tops $100 as U.S.-Iran military clashes intensify
Turning to the Middle East, oil prices remained one of the main concerns for precious metal market participants. Brent crude futures were last up 3.7% to $101.57 a barrel, topping the $100 level for the first time since May 26.

The advance came as military engagements between the U.S. and Iran showed no signs of ending, following a resurgence in such kinetic action last week for the first time since July. U.S. Central Command on Tuesday said it had destroyed five Iranian crude oil carriers in response to the targeting of a U.S. Navy warship by the Islamic Revolutionary Guard Corps.

Iran’s state media said Tehran responded to the strikes by hitting two American vessels, eight oil tankers, 10 U.S.-backed ships, and a U.S. military base in Jordan. Tehran suggested that the bombardments caused heavy damage, but Jordanian officials said that 18 of 20 Iranian missiles were intercepted, while the remaining two fell on unpopulated areas.

The return to military action has come after a period of stalemate between the U.S. and Iran, as both sides wrestle for control over the Strait of Hormuz. Hopes for an imminent resolution to the fighting has faded. Speaking during a visit to Colombia, U.S. Secretary of State Marco Rubio indicated that the tit-for-tat strikes are unlikely to cease soon, warning Iran that it will “lose tankers” when it tries to “hit U.S. naval ships.”