Gold slides as higher US inflation reinforces Fed tightening bets

By Noel John

Oct 29 (Reuters) - Gold dropped 1% on Thursday as data showing elevated US inflation reinforced expectations of a Federal Reserve interest rate hike later this year, reducing the appeal of the non-yielding metal.

Spot gold was down 1% to $4,026.12 per ounce by 9:13 a.m. EDT (1313 GMT). US gold futures for December delivery fell 0.3% to $4,037.60 per ounce. Bullion is on track for its second straight monthly decline.

"A stubbornly high inflationary outlook that continues to run hotter than Fed targets is paving the way for thoughts that the Fed will raise rates at the December meeting. That's ... the main drag on the gold market right now, and today's PCE report did nothing to allay that fear," David Meger, director of metals trading at High Ridge Futures, said.

US inflation, as measured by the Personal Consumption Expenditures Price Index, accelerated in September as consumers paid more for gasoline and other goods. The PCE climbed 0.5% last month after an unrevised 0.3% rise in August, the Commerce Department's Bureau of Economic Analysis said.

On Wednesday, the Fed kept rates unchanged, as expected, deferring changes to borrowing costs until after next week's US midterm elections.

Traders are pricing in about an 83% chance of a US rate hike in December, according to CME Group's FedWatch Tool. Higher interest rates increase the opportunity cost of holding non-yielding gold.

"The next major focal point of the market is a continued watch on the energy market, as we understand that the energy market is a large portion of those inflationary concerns. So any type of escalation or de-escalation in the Middle East that would result in higher or lower energy prices potentially has a significant effect on metals prices," Meger added.

Investors are also focusing on the November 3 US elections and their potential impact on fiscal policy and broader market sentiment.

Elsewhere, European Central Bank President Christine Lagarde will step down from her role on February 7, the central bank said. The ECB kept interest rates unchanged, but warned that inflation risks were on the rise from surging energy costs.

Spot silver fell 2.7% to $52.54 per ounce, platinum dropped 3.7% to $1,486.47 and palladium slid 0.7% to $1,003.58. All three metals were headed for a second straight monthly decline.