After a strong rebound fueled by cooling US inflation data, gold has paused its rally, with momentum fading near two-month highs. On Thursday, spot gold briefly approached $4,450 per ounce, hitting its highest level since June 5, before retreating below the key $4,400 mark, with intraday losses reaching 1%. This comes after a more than 9% gain over the past two weeks and a monthly increase of over 8%, reclaiming the critical psychological threshold of $4,000.

The core driver behind this surge is clear: softer US employment and inflation figures have dampened market expectations for a September rate hike by the Federal Reserve, while a weaker dollar has opened the door for gold's upside. However, traders are now hesitant to chase the rally further, awaiting the upcoming US Producer Price Index (PPI) data to assess whether the disinflation trend is sustainable. The July Consumer Price Index (CPI) rose 3.4% year-over-year, down from 3.5% in June, marking a second consecutive decline, while the core CPI increased 2.5%, the lowest since March 2021. Following the data release, bets on a September rate cut fell, with interest rate futures now pricing in a roughly 40% probability, down from about 54% a week ago.

Aakash Doshi, head of global gold and metals strategy at State Street Global Advisors, noted that the rally over the past three to four weeks was primarily driven by a shift in Fed expectations and a weaker dollar. The US Dollar Index is hovering near its lowest levels since mid-June. More importantly, capital is flowing back into the gold market. SPDR Gold Shares, one of the largest gold ETFs in the US, saw net inflows of $284 million in July, its first positive month since March. In the first two weeks of August alone, inflows have already exceeded $2 billion. Gold mining equities ETFs also regained inflows in July, suggesting that this rebound is not just a short-term speculative move in futures markets, but a return of previously sidelined investors seeking gold.

One unusual aspect of this rally is that long-term US Treasury yields remain elevated. The 10-year yield is hovering around 4.7%, while the 30-year yield briefly touched 5.28%, its highest since 2007. Traditionally, high real interest rates weigh on gold, as the non-yielding asset must compete with bonds that generate income. However, gold has not been crushed by high yields this time. The reason may lie in a reassessment of why long-term yields are so high. If yields are rising due to a strong economy, higher productivity, and confidence that the Fed can control inflation, gold would indeed face pressure. But if the rise stems from a massive fiscal deficit, heavy Treasury supply, persistent inflation uncertainty, and investors demanding higher risk premiums, then high yields could actually reinforce gold's safe-haven appeal. In other words, gold may be transitioning from a "rate-cut trade" to a hedge against fiscal risks, monetary policy uncertainty, and sovereign debt stress, explaining why it can rally even with 30-year yields near 5.3%.

In the near term, gold bulls face two key variables. First, the upcoming US PPI data. If it shows continued subdued inflation, it could further weaken September rate hike expectations, pressuring the dollar and Treasury yields, and providing fresh momentum for gold. Conversely, if PPI surges, reigniting fears that energy prices, tariffs, and geopolitical tensions are feeding into broader goods and services costs, gold could face periodic volatility. The second key variable is the Jackson Hole global central bank symposium in late August. Fed Chair Jerome Powell has maintained a hawkish tone on inflation but has not committed to a September rate hike. Markets are awaiting clearer policy signals from him at the event. Additionally, a short-term factor favoring gold is its seasonal strength. Doshi of State Street suggests that gold prices may have room to rise, with his team forecasting a recovery to around $5,000 per ounce by year-end.