Gold edged lower on Monday as investors remained cautious over the possibility of a Federal Reserve interest rate hike later this month.
Spot gold fell as much as 1% before holding around US$4,400 ($6,110) an ounce, while US gold futures declined 0.6% to about US$4,450 per ounce.
The move extended Friday’s losses, when a stronger-than-expected US jobs report bolstered expectations that the Fed could raise rates at its upcoming policy meeting.
Higher interest rates are typically a headwind for bullion because it yields no interest.
Middle East tensions lift energy prices
With trading subdued on Monday due to a US public holiday, investors were focused on developments in the Middle East.
Tensions escalated again over the weekend after the US and Iran traded attacks on oil tankers, pushing crude prices to a six-week high.
Higher energy prices stemming from the conflict have weighed on gold throughout the year by adding to inflationary pressures and strengthening the case for central banks, including the Fed, to maintain tighter monetary policy.
Recent US economic data, alongside hawkish comments from Fed Chair Kevin Warsh, have further supported expectations of higher rates.
“Gold and silver have moved in the opposite direction to energy prices, extending their declines after Friday’s strong US jobs report lifted bond yields and reinforced expectations of a Fed rate hike on 16 September,” Saxo Bank Head of Commodity Strategy Ole Hansen told Reuters.
Traders are now pricing in around a 60% chance of a rate hike at the Fed’s policy meeting next week, according to the CME FedWatch Tool, up from about 50% before Friday’s jobs report.
Inflation data in focus
Investors are now turning their attention to key US inflation data due later this week for further clues on the direction of monetary policy.
“Another firm PPI or CPI print could reinforce the renewed tightening story, crack that $4,400 defense and deepen the downside move,” Vantage Markets Senior Analyst Hebe Chen told Bloomberg.
“Softer inflation could temporarily take some pressure off gold, but at this stage it may prove more of a reprieve than a reset.”
The inflation readings could prove particularly important after Friday’s labour data strengthened the case for monetary tightening.
Long-term gold case remains intact
Despite the near-term headwinds, some remain bullish on gold as the metal reasserts its traditional role as a portfolio hedge.
Goldman Sachs is among the major banks maintaining a positive outlook, forecasting bullion could reach US$4,900 an ounce by the end of the year.
Renewed central bank buying and the so-called debasement trade have also provided support, echoing some of the forces that helped propel gold to a record high near US$5,600 in January.
“At moments when markets were worried about the debasement theme, we saw gold prices going up,” Goldman Sachs Co-Head of Global Commodities Research Daan Struyven told Bloomberg TV earlier.
“In those circumstances, gold is clearly acting as a hedge,” he added.
For now, however, the immediate direction for bullion is likely to remain tied to expectations around the Fed, with this week’s inflation readings providing the next major test for gold prices.
Write to Jackson Chen at Mining.com.au
Image: The Perth Mint
