Gold fell to its lowest level in more than a month on Monday as surging oil prices further bolstered expectations that the Federal Reserve will raise interest rates this week.
Spot gold declined nearly 2% towards US$4,250 ($5,959) an ounce, its lowest since the first week of August, while US gold futures dropped more than 2% to below US$4,300 an ounce.
The latest sell-off came as another rally in oil prices fuelled concerns over global inflation, adding pressure on central banks to tighten monetary policy.
Benchmark crude futures climbed to US$108 a barrel on Monday after Saudi Arabia closed its East-West pipeline, a key route for bypassing the Strait of Hormuz during the US-Iran war.
“We’ve got crude oil prices that are sharply higher today, which is driving inflation expectations,” American Gold Exchange Market Analyst Jim Wyckoff told Reuters.
Higher interest rates typically weigh on gold by increasing the relative appeal of yield-bearing assets.
Wyckoff adds surging energy prices “suggest the major central banks of the world are going to have to tighten their monetary policies to control inflation, and that’s bearish for the metals”.
Fed hike almost certain
In the US, expectations that higher energy costs will feed into broader inflation have increased pressure on the Fed to deliver its first interest rate hike in three years.
Those concerns were reinforced by Friday’s consumer price index data, which showed core inflation increased 0.3% month-on-month in August.
A majority of economists surveyed by Reuters now expect the Fed to raise rates on Wednesday and deliver at least one additional hike by the end of March. Before the CPI release, the consensus was for rates to remain unchanged.
Traders are now pricing in around an 89% probability of a rate hike at the conclusion of Wednesday’s meeting, according to CME’s (NASDAQ:CME) FedWatch Tool.
“The market has largely priced in the risk of a rate hike this week, but gold still faces further headwinds if it materializes,” JPMorgan (NYSE:JPM) Private Bank Asia Head of Rates and FX Strategy Yuxuan Tang told Bloomberg.
“By contrast, a hold, hawkish or dovish, would likely push real yields lower and reignite concerns about policy credibility and currency debasement, which should be supportive for gold.”
The Bank of Japan is also expected to raise interest rates on Friday amid concerns over rising energy prices.
Gold back in negative territory
Gold has been hit hard by the Middle East conflict, with prices falling from around US$5,300 in early March to a floor of roughly US$4,000 in July.
Bullion then staged a recovery during August, supported in part by an aggressive US Treasury buyback program aimed at containing yields.
Monday’s decline, however, pushed gold back into negative territory for the year.
Despite the near-term pressure from inflation and higher interest rates, major banks remain constructive on the metal’s longer-term outlook as investors continue to view bullion as a portfolio hedge.
Goldman Sachs (NYSE:GS) is targeting US$4,900 an ounce, while UBS Group (NYSE:UBS) sees gold reaching US$4,600 towards the end of the year.
Write to Jackson Chen at Mining.com.au
Image: Federal Reserve Bank of Atlanta
