Hotter U.S. Inflation Strengthens the Case for a December Rate Hike

Headline CPI increased by 0.35% in October, which was higher than the consensus forecast of 0.3%. The three months moving average was 5.6% on an annualized basis. The core CPI increased by 0.3%, which was above the consensus forecast of 0.2% and the three months moving average was 3.7% on an annualized basis.

The effects of high fuel prices are spreading beyond energy and food and into the broader economy as seen in the chart below. The chart shows that the monthly CPI has grown significantly across several categories in October. This pressure is also evident in food prices which rose by 0.47%.

The chart below shows that growth in the GDP price deflator dropped sharply to 0.54% in Q3 from 1.5% in Q2. But the growth over the past four quarters was still 3.7%, which is the same as the three month annualized growth rate in core CPI.

Can the 10-Year Treasury Yield Break Above 5%?

The 10-year U.S. Treasury yield also rebounded from the support zone and reached the 5% level. The chart below shows that the yield rebounded from support at the ascending trend line that stretches from the lows of February 2026 when the U.S.-Iran war began. A confirmed break above the 5% level will open the way for rally towards 5.30%.

The chart below shows that the 10-year Treasury yield remains strong in 2026. The positive trend in yields suggests that it could rise further and converge with nominal GDP growth which is currently at 5.9%. The growth in GDP is expected to be maintained in Q4 as the AI spending is strong. The latest fundamentals and technicals suggest that 10-year Treasury yield would likely increase further in 2027.

Why Higher Treasury Yields Weigh on Gold and Silver

The high Treasury yields keep gold and silver (XAG) prices under pressure as seen in the chart below. It is observed that gold and silver prices consolidated in tight range as Treasury yields increased from 0.5% in August 2020 to 5% in October 2023.

When U.S. Treasury yields consolidated between 5% and 3.70% from October 2023 to February 2026, gold and silver prices surged to record highs of $5,600 and $120, respectively.

But when U.S. Treasury yields increased from the low of 3.96% in February 2026 to the high of 5.36% in October 2026, gold prices remained under bearish pressure and dropped below the key support zone of $4,000. Silver dropped towards the $48-$50 support zone at the same time.

Therefore, if U.S. Treasury yields break higher and continue to rally, gold and silver prices may remain under pressure.

Gold Price Levels to Watch Below $4,000

From a technical perspective, gold rebounded from the low of $3,870 and rallied strongly towards the $4,150 level. But the price failed to break above $4,150 and dropped below $4,000 again.

This suggests that prices remain under pressure. A confirmed break below $3,900 will likely open the way for a significant drop in gold prices towards the $3,500-$3,600 area. The $3,900-$4,000 support zone remains critical for the gold market. The price needs to clear $4,150 to avoid this deeper correction.

What to Watch Next

Gold prices dropped below $4,000 after failing to break above $4,150. The high diesel prices are driving up the inflation outlook and long-term Treasury yields. The increase in inflation increases pressure on the Fed to raise the funds target rate, with 2-year Treasury yields pricing in at least 3 more 25 basis point rate hikes.

In my view, the US Treasury yield will likely remain strong in 2207 as the current AI bailout boosts nominal GDP growth. The increase in interest rates also threatens a steep increase in the budget deficit. The short-term trend in gold remains bearish, but the outlook is still bullish in the long term. Therefore, this correction in gold will likely provide good opportunities for long-term investors.

Read more: Higher Yields Put Gold Rebound at Risk