Gold prices drop to session lows down nearly 1% on the day as U.S. CPI rises 0.1% in August

NEW YORK (Sept 13)  The gold market has dropped like a stone into negative territory as U.S. inflation pressure rose more than expected, significantly missing expectations.

Tuesday, the U.S. Labor Department said its much-anticipated Consumer Price Index rose 0.1% in August after an unchanged reading in July. Economists were looking for a drop of 0.1%.

The report said that annual inflation rose 8.3% last month. Economists were expecting to see a rise of 8.1%.

Core CPI, which strips out volatile food and energy prices, rose sharply by 0.6% last month. According to consensus estimates, economists were looking for a 0.3% rise.

For the year, core inflation is up 6.3%.

The gold market has seen a significant reaction to the latest inflation numbers, giving up all its overnight gains. December gold futures last traded at $1,723.90 an ounce, down nearly 1% on the day.

The latest inflation data is a surprise for many economists as they were looking for cooler inflation pressures as gasoline prices fell nationwide last month. The report highlighted the broad-based rise in consumer prices in shelter, food, and medical care. At the same time, gasoline prices dropped 10.6%, pushing overall energy prices down 5%.

According to some economists and market analysts, any hope that the Federal Reserve will slow its aggressive rate hikes anytime soon has been dashed. As gold prices drop, the U.S. dollar is trading at session highs.

"This is a potential game-changer in the dollar trade and it has surged higher across the board," said Adam Button, head of currency strategy at Forexlive.com.

Button added that not only have expectations of a 75-basis point hike next week solidified, but markets are not starting to price in a full 1% move.

Katherine Judge, senior economist at CIBC, said that she is looking for Federal Reserve to move the Fed Funds rate up by 75 basis points next week. She noted that the rise in food costs has more than offset the drop in energy prices.

"All told, with most categories except for energy commodities looking uglier, the Fed will no doubt be hiking by at least 75bp next week," she said.

KITCO