The price of gold (XAU/USD) experienced a correction, retreating by half a percent to the $2,340s on Monday, following the release of US Consumer Sentiment data that hinted at a potential prolongation of higher interest rates. This development has diminished gold’s attractiveness as a non-yielding asset.
Gold’s downward movement came in response to the University of Michigan Consumer Sentiment Survey released on Friday, which revealed an unexpected decline in sentiment alongside heightened inflation expectations.
The preliminary University of Michigan Consumer Sentiment index for May dropped to 67.4 from the previous 77.2, diverging significantly from economists’ forecast of a more modest decline to 76.0. Simultaneously, the long-run inflation expectations component increased to 3.1% from the previous 3.0%.
The rise in inflation expectations implies that the Federal Reserve (Fed) might delay its anticipated interest rate cuts. This scenario is viewed unfavorably for gold, as higher interest rates elevate the opportunity cost of holding gold relative to interest-yielding assets such as bonds or cash.
