Gold futures hit 4-month low on upbeat U.S. retail sales, inflation below Fed target

Gold fell to the lowest since the beginning of July after the Commerce Department reported that U.S. retail sales jumped in October and exceeded analysts expectations, indicating the 16-day federal government shutdown had little effect on the U.S. economic recovery. A report by the Labor Department showing consumer and core consumer inflation overall met projections and remained well below Feds targeted 2% further pressured the precious metal, which is mainly used as a hedge against inflation. Silver remained fairly unchanged, while platinum and palladium extended losses.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in December fell by 1.06% to $1 260.00 by 14:38 GMT. Prices plunged to a 4-month low of $1 258.30 an ounce minutes after the release of the data, while days high was touched earlier in the day at $1 275.70. The precious metal rose by 0.1% on Tuesday but extended its weekly decline to 2.3% on Wednesday.

Futures were pushed down after a gauge of U.S. consumer spending rose more than expected in October, signaling the 16-day government shutdown had little to no effect on the economy and suggesting upside momentum early in the fourth quarter.

The U.S. Commerce Department reported that retail sales rose by 0.4% last month, exceeding the median estimate of 86 analysts surveyed by Bloomberg for a minor 0.1% advance. Septembers reading received and upward revision to 0.0% after being initially estimated at -0.1%.

Meanwhile, core retail sales, which exclude the volatile automobile market, jumped by 0.2% last month after Septembers reading was revised down to 0.3% from initially calculated at 0.4%. Core retail sales correspond closely with the consumer spending component of gross domestic product (GDP). Their jump was largely based on increased demand for clothing, electronics, furniture and sporting goods.

Sales at electronics and appliance stores rose by the most since April, while sales at automobile and parts dealers jumped by 1.3% after falling by 1.2% in the preceding month.

Michael Brown, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, commented for Bloomberg: “Maybe the rhetoric was just a little bit overblown in terms of the magnitude of the economic impact behind the partial government shutdown. As we get ready to go into the holiday shopping season, this is welcome news.”

Consumer inflation

Also fanning negative sentiment for gold, the Labor Department reported on Wednesday that U.S. consumer inflation generally met analysts expectations and remained well below Feds official target of 2%, limiting demand for the precious metal as a hedge against rising prices.

The consumer price index (CPI) dropped by 0.1% in October as prices of energy, new cars and clothing fell, confounding expectations for a 0.1% increase and underperforming the preceding months 0.2% jump. Year-on-year, consumer inflation matched projections and rose by 1.0%, the slowest advance since October 2009, trailing Septembers 1.2% gain.

Core consumer prices, which exclude the more volatile food and energy costs, met expectations and inched up by 0.1% in October, gaining by the same margin for a third straight month. Year-on-year, core consumer inflation surged by 1.7%, matching both anticipations and Septembers 1.7% advance.

The lack of any surprises to the upside pressured gold, which is mainly used as a hedge against inflation. The metal has fallen nearly 26% this year after the Federal Reserve announced it will begin scaling back its massive bond purchasing program in the near future, if the U.S. economy continues to provide signs of sustainable recovery. With inflation running well below Feds official target of 2% however, the central bank has more room to ease money supply.

Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, said for Bloomberg prior to the report: “Inflation is a distant concern at this time. It gives the Fed room for its continued quantitative-easing efforts.”

Market players are also awaiting the release of FOMCs October meeting protocols at 19:00 GMT. Gold drew support after Federal Reserve Chairman Ben Bernanke said yesterday the central bank will maintain its aggressive monetary policy for as long as needed and will commence scaling back its bond purchases once it is assured the labor market recovery is robust and will continue.

Bernanke also said the Federal Reserve will probably keep down its target interest rate even after bringing its quantitative easing program to an end and most likely after the U.S. unemployment rate falls below 6.5%.

“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the jobless rate breaches the Fed’s 6.5 percent threshold.”