Gold fell 2.5% on the day US inflation came in hot. Here's the link

What happened

Gold fell sharply on 10 November. Reuters reported spot gold down 2.3% at $4,043.73 an ounce; CaixaBank Research put the fall at 2.6%, to around $4,030. It edged back up the next morning, to about $4,038. The trigger was the US inflation report: core prices rose 0.3% in October against a forecast of 0.2% (our story), and futures moved to price a December Fed rise as almost certain (our story).

Gold is now about a quarter below its record of more than $5,300 an ounce, set in late January, before the war with Iran began (our earlier story).

Why higher rates hurt gold

Gold earns nothing. A bond or a bank deposit pays interest; a bar of gold does not. So the cost of holding gold is the interest you give up. When markets expect higher interest rates, and especially higher rates after inflation, that cost rises and gold becomes less attractive. On 10 November, the US 2-year yield jumped 19 basis points in a day.

Two other forces pushed the same way. The dollar rose 0.6%, and gold, priced in dollars, tends to fall when the dollar rises, because it becomes more expensive for buyers paying in euros, yen or yuan. And oil had fallen below $90 on hopes of an end to the war with Iran (our story), which reduced demand for gold as a safe haven.

But isn't gold a hedge against inflation?

Over decades, broadly yes. Over months, what matters more is how central banks respond. If inflation rises and the central bank lets it run, real interest rates fall and gold tends to do well, as in the 1970s. If the central bank responds by raising rates faster than inflation, real rates rise and gold tends to suffer, as in the early 1980s under Paul Volcker, when gold fell from $850 to well under $400 (our history page). Our safe havens mechanic explains why investors' choice of refuge depends on what they fear.

Where it sits in the chain

This is Link 1, inflation and rates, feeding Link 3, currencies and safe havens: an inflation surprise lifted expected rates and the dollar, and gold paid the price.

What to watch

• Fed officials' comments ahead of the 8–9 December meeting.
• Real yields: the US 10-year yield minus expected inflation.
• Central banks' gold purchases, a big source of demand in recent years.