Gold sinks on rate hike fears, copper outperforms this week

By Ambar Warrick

Investing.com -- Gold prices fell on Friday as stronger-than-expected U.S. inflation data and hawkish comments from Federal Reserve officials brewed concerns over more interest rate hikes, while optimism over China saw copper prices outpace metal markets this week.

U.S. producer price index inflation grew more than expected in January, data showed on Thursday, coming on the heels of an overheated consumer price index report and indicating that inflation in the world’s largest economy remained sticky.

St. Louis Fed President James Bullard said that the central bank could return to raising interest rates at a sharper pace, and raised the prospect of a 50 basis point hike in March.

Separately, Cleveland Fed President Loretta Mester also said that interest rates will likely rise above 5% as the Fed moves against inflation, and that the central bank should have hiked rates by more than 25 bps at its February meeting.

The dollar and Treasury yields shot up after their comments, with investors piling into the greenback on the prospect of better and safer returns. This pulled a bulk of flows away from gold markets.

Spot gold sank 0.2% to $1,833.67 an ounce, while gold futures fell 0.5% to $1,842.75 an ounce. Prices of the yellow metal were set to lose between 1% and 1.7% this week, their third straight week in red.

The prospect of rising U.S. interest rates bodes poorly for non-yielding assets like gold, as it drives up their opportunity cost. Rising rates also see investors favor the dollar as a safe haven asset, given that it offers better returns.

Other precious metals also sank on Friday. Platinum futures fell 0.6% to $920.30 an ounce- an over three-month low, while silver futures slumped 1.2% to $21.448 an ounce, a 2-½ month low.

Among industrial metals, copper prices retreated on Friday but were still set to end the week positive on optimism over China and potential supply disruptions.

High-grade copper futures fell 0.2% to $4.1137 a pound, and were set to rise 2.4% this week - their best weekly performance since early-January.

Copper was also set to break three straight weeks of declines as China, the world’s largest copper importer, flagged more stimulus measures to shore up economic growth. The move renewed optimism over a Chinese economic recovery after the country relaxed most anti-COVID measures earlier this year.

A deepening dispute between the Panama government and foreign copper miners also threatened to suspend the country’s copper exports, which could limit supply and push up prices.