Gold prices moved lower on Monday as a sharp rise in oil prices renewed inflation concerns and strengthened expectations of higher interest rates from major central banks this week.
Spot gold fell 0.3% to $4,334.31 per ounce by 0330 GMT, extending pressure on the precious metal after it recorded its third straight weekly decline on Friday. U.S. gold futures also weakened, falling 0.8% to $4,375.00.
The latest decline came as energy prices moved higher, adding to concerns that inflation could remain elevated. For gold, the combination of stronger oil prices and rising rate expectations has created a difficult backdrop because higher interest rates can reduce the attractiveness of assets that do not generate a yield.
Oil Rally Adds Pressure Ahead of Fed Meeting
Oil prices climbed more than 2% on Monday following fresh Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf. Supply concerns were also intensified after the closure of a key Saudi oil pipeline.
The jump in oil prices has added another layer of uncertainty for financial markets just ahead of the U.S. Federal Reserve’s policy meeting, scheduled for Tuesday and Wednesday.
Tim Waterer, chief market analyst at KCM Trade, said gold was facing pressure from rising energy prices and higher rate expectations ahead of the Federal Reserve and Bank of Japan meetings.
He also pointed to continued buying interest during price declines, with investors still able to view gold as a hedge against uncertainty while geopolitical developments and monetary policy remain unsettled.
U.S. Inflation Data Strengthens Rate-Hike Expectations
Expectations around U.S. interest rates have shifted following the latest inflation figures.
Data released last week showed that U.S. consumer prices accelerated in August. A key measure of underlying inflation also recorded its biggest increase in four months.
The inflation reading has strengthened expectations that the Federal Reserve could raise interest rates at its upcoming meeting.
According to the CME FedWatch Tool, traders are pricing in an 86.5% probability of a U.S. rate hike at the meeting on Tuesday and Wednesday. That compares with an estimated 67% probability before last week’s inflation data.
The change in expectations has added to the pressure on gold. While bullion is often considered a hedge against inflation, higher interest rates can make non-yielding gold less attractive compared with interest-bearing assets.
Bank of Japan Rate Decision Also in Focus
The Federal Reserve is not the only major central bank drawing attention from investors this week.
The Bank of Japan is also widely expected to raise interest rates on Friday. Persistent inflation and resilient economic growth have increased expectations of additional rate increases.
The outlook for monetary policy comes against a backdrop of rising energy prices and limited signs of easing tensions in the Middle East.
For gold markets, the simultaneous focus on policy decisions by major central banks adds to the uncertainty surrounding interest rates and yields.
Middle East Tensions Keep Uncertainty High
Geopolitical developments remain another important factor for markets.
Diplomatic efforts in the Middle East appeared to lose momentum after a meeting between Iran and other Gulf states was postponed.
The combination of supply concerns in the oil market and continuing tensions in the region has contributed to the recent rise in energy prices. At the same time, higher oil prices are feeding concerns about inflation at a time when central banks are already under close scrutiny over their interest-rate decisions.
For gold, this creates a mixed environment. The metal is facing pressure from expectations of higher rates, while ongoing geopolitical and economic uncertainty could continue to support demand for it as a hedge.
Silver, Platinum and Palladium Also Mixed
Other precious metals also recorded limited moves on Monday.
Spot silver declined 0.7% to $64.02 per ounce. Platinum was steady at $1,796.90, while palladium was little changed at $1,298.80.
Gold’s next moves are likely to remain closely watched as markets turn their attention to the Federal Reserve’s upcoming policy decision and the latest developments in oil and geopolitical tensions.
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