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London Gold Price Slips from 2-Week High as Fed and Inflation Fears Rally with Crude Oil

The GOLD PRICE in London dropped back from a 2-week high of $1930 per Troy ounce on Monday as longer-term US interest rates rose to new 16-year highs as crude oil climbed to new 2023 highs ahead of a raft of central-bank policy decisions from the US, the UK and Japan, writes Atsuko Whitehouse at BullionVault.
China's central bank has meantime lifted what the Financial Times calls "temporary curbs" on gold imports – confirming what BullionVault and other commentators suggested on Friday when Shanghai prices edged back from a run of new record gold highs and global prices rose. 
London gold prices in US Dollar terms today fell back to $1923 per ounce – erasing an overnight rise – after rallying nearly 1% on Friday as the relaxation of China's import restrictions coincided with strong expectations in the interest-rate markets that the Federal Reserve will pause its rate rises at this Wednesday's meeting.
But the price of US Treasury bonds edged back Monday, pushing up the 10-year yield – a benchmark rate for government as well as many finance and commercial borrowing rates – to 4.35% during early trading, the highest since August 2007, start of the global financial crisis, as US crude oil prices rose to their highest so far this year.
Chart of Dollar gold price vs. Dollar crude oil price (WTI). Source: BullionVault
Adding another 0.4% by the start of US trade Monday to reach more than $90 per barrel, WTI crude has now rallied almost 30% from its low point in June after oil giant s Russia and Saudi Arabia confirmed ongoing cuts to production and import data showed rising energy demand in China.
Brent crude, the European oil price benchmark, also rose to a 10-month high, touching $94 a barrel and also extending last week's 4% gain.
The International Energy Agency (IEA) warned last week that the ongoing supply cuts made by the two Opec+ leaders would create a "significant supply shortfall", which poses a considerable threat to ongoing price volatility. 
A research paper from the International Monetary Fund (IMF) meanwhile warned Friday against "premature celebrations" over defeating the last 2 years' surge of inflation to 4-decade highs, analyzing 100 "inflation shocks" across 56 countries since the 1970s and finding that only 60% of those cases saw inflation brought back down within 5 years.
US consumer prices increased by 0.6% in August from July, the largest monthly gain since June 2022, as gasoline prices jumped 10.6% to accounted for more than half of the increase in the CPI index.
But consumers now expect inflation in the year ahead to slow to 3.1%, down from 3.5% in the prior month's survey from the University of Michigan and "the lowest since March 2021."
Further out, US consumers expect inflation in the next five-to-ten years to drop to 2.7% per annum, "falling below the narrow 2.9-3.1% range for only the second time in the last 26 months."
"[That] drop a seriously welcome development," says one macro-economist, calling it "a big step towards normalisation." 
According to derivatives exchange the CME, traders now see a 99% chance that the Fed will keep its target for US Dollar interest rates at 5.25-5.50% on Wednesday, but Fed chair Jerome Powell "will leave the door open to further rate hikes," says a note from Commerzbank. 
"This will keep the gold price in check in the short term." 
"It's very reasonable to see lower yields in an economic environment heading into a downturn," said  
"The picture for bond buyers gets complicated," says Roger Hallam, global head of rates at giant US asset managers Vanguard, "should higher energy prices stall the recent disinflationary trends [because] sticky inflation would make it very difficult for the Fed to ease next year."
With the US Dollar slipping on the FX market today, gold priced in Euros and the UK Pound edged higher 0.1% to €1806 and £1556 per ounce respectively as traders bet that the Bank of England will raise UK interest rates again on Thursday after the European Central Bank defied weak economic data from Germany to raise Euro rates again last week.
The Bank of Japan will then hold its ultra-loose policy and negative interest rates unchanged on Friday, according to a survey of traders and analysts by Bloomberg, despite BoJ governor Kazuo Ueda's recent "hawkish" remarks over defending the value of the Yen
Gold prices in the Japanese Yen steadied Monday at ¥9147 per gram after hitting a fresh all-time high on Friday at ¥9172 as the Yen weakened to its lowest level since November 2022, briefly nearing ¥148 per Dollar.
The Yuan price of gold in China – the precious metal's No.1 consumer and central-bank buyer – meanwhile fell 0.6% from last week's new all-time high of ¥468 per gram as the central bank began issuing new import licenses and the currency recovered from close to its weakest against the US Dollar since the creation of the offshore Yuan market in 2010.
With multiple sources reporting that the People's Bank has begun issuing new gold import licenses, the Chinese premium over London quotes – the gold's market international reference rate – fell Monday to $69 per ounce at the Shanghai Gold Exchange according to BullionVault's calculations, almost halving from Thursday afternoon's all-time Shanghai gold premium record of $121.
Representing the incentive offered to bullion banks for new imports, that premium averaged around $9 over the last 5 years if the Covid Crash of 2020 is excluded, when China's domestic demand was crushed by strict lock-down laws.

Atsuko Whitehouse is the Head of the Japanese Market at BullionVault and the Editor of Japanese GoldNews.

See all articles by Atsuko Whitehouse here.

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