Spot gold attracted buying for the second consecutive day on Friday (October 16), currently trading around $4,180 per ounce. Neutral comments from Federal Reserve Chairman Warsh and declining US Treasury yields pushed the dollar index to a near two-week low, boosting gold, a non-interest-bearing asset. However, rising expectations of a December rate hike and geopolitical risks in the Middle East limited the dollar's decline, also limiting upside potential for gold prices.

The dollar weakened across the board, and gold continued its upward trend.

Gold attracted buyers for the second consecutive day on Friday, benefiting from a broad-based weakening dollar, but remained within a two-week range. The dollar index (DXY), which tracks the dollar against a basket of currencies, fell to a near two-week low as comments from Federal Reserve Chairman Kevin Warsh at the IMF and World Bank Group annual meetings offered little change to the interest rate outlook. In a conversation with IMF Managing Director Kristalina Georgieva, Warsh stated that the Fed is clearly committed to price stability and he does not believe in predicting the outcome of the meetings. This, along with the recent sharp decline in U.S. bond yields, pressured the dollar and provided a tailwind for non-interest-bearing precious metals.

Warsh's speech: Investment surge and AI risks, Fed retains year-end options

Warsh's admission of being "overly alarmed by the global financial crisis" underscores a cautious stance, even as he emphasizes structural growth and a surge in investment driven by "good policies," suggesting a reserved hawkish position unwilling to commit pre-emptively to the October and December decisions. Warsh's focus on AI as a recent demand-side force and a tool for boosting confidence through data, coupled with concerns about negative tail risks, reinforces a risk-aware policy framework rather than a clear directional shift. While Warsh's remarks did not escalate hawkish expectations, they maintained a strong, restrictive policy bias, which should keep the dollar's support intact.

Inflation Background: Energy-driven inflation accelerates, expectations for a December rate hike rise.

Despite this, accelerating energy-driven U.S. inflation keeps bets on an imminent Federal Reserve rate hike on the table. On Wednesday, the Bureau of Labor Statistics reported a broad-based increase in consumer prices in September, driven by high oil prices due to the ongoing war between the U.S., Israel, and Iran. Furthermore, the U.S. Producer Price Index (PPI), released on Thursday, rose 1.3% last month, the largest increase since March 2022, with the annual rate surging to 6.3%. Excluding the volatile food and energy sub-categories, the core PPI rose 0.7% month-over-month and 5% year-over-year. This indicates that inflation is extending beyond energy products, supporting the prospect of further tightening by the Fed. According to the CME Group's FedWatch tool, traders are pricing in a greater than 90% probability of another rate hike at the Fed's December policy meeting.

Geopolitics: Escalating tensions in the Middle East limit the dollar's decline and suppress gold prices.

This, coupled with escalating tensions in the Middle East, helped limit the decline of the safe-haven dollar and also suppressed gold's gains. In the latest developments, the Iranian-backed Houthi rebels launched a deadly missile attack on the presidential palace in Aden, the seat of the Saudi-backed, internationally recognized government in the southern city of Aden. Furthermore, French Foreign Minister Pascal Confaeffle confirmed that France has begun deploying military assets in Saudi Arabia. Additionally, the US military has developed plans to strike Iranian energy infrastructure and nuclear facilities, including targeting the "Mother of All Bombs." This increases the risk of further escalation of tensions in the Middle East, which could continue to support the dollar and suppress gold.

Summarize

Gold rose for a second straight day on Friday, supported by a drop in the dollar index to a near two-week low, pressured by neutral comments from Warsh and declining bond yields. However, accelerating energy-driven inflation has pushed the probability of a December rate hike above 90%, and escalating tensions in the Middle East, including a Houthi attack on the presidential palace in Aden, France's deployment of military assets in Saudi Arabia, and the US's plans to strike Iraq, supported the safe-haven dollar and limited gold's gains. (Spot gold daily chart, source: EasyTrade) At 16:04 Beijing time, spot gold was trading at $4182.14 per ounce.