Gold held its decline on Tuesday, trading near $4,290 an ounce after falling more than 1% in the previous session to a five-week low. The drop came as disruptions to oil flows from the Middle East strengthened the case for the Federal Reserve to raise interest rates as soon as this week.
Oil supply fears add to rate-hike pressure
Saudi Arabia closed its East-West pipeline after attacks last week, halting millions of barrels per day that were being moved to bypass tensions in the Strait of Hormuz. The kingdom has not said how long the disruption will last or how quickly it can shift shipments through the strait to compensate. The resulting rise in oil prices has stoked concerns that higher energy costs will feed through to broader inflation, piling pressure on the Fed to act.
Traders now price in a 92% chance of a rate increase when the central bank meets in the coming days. Such a move would be the first in three years. Higher borrowing costs are typically negative for gold, which does not pay interest, because they increase the opportunity cost of holding the metal.
Treasury yields add to headwinds
The 10-year Treasury yield briefly touched 5% on Monday for the first time in nearly three years, driven by inflation worries and rising government and corporate borrowing needs. That further weighed on non-yielding bullion. Gold has fallen more than 3% in September, after trading above $4,600 an ounce in late August, as investors repeatedly adjusted their expectations for Fed policy.
Spot gold was down 0.3% at $4,288.18 an ounce in early Asian trade. Silver slipped 0.2% to $63.11 an ounce after declining 2% the previous day. Platinum and palladium also edged lower. The Bloomberg Dollar Spot Index was stable after rising 0.4% in the prior session.
Long-term outlook remains divided
Despite the near-term headwinds, many investors still expect gold to grind higher over time as it rediscovers its traditional role as a portfolio hedge. The metal’s recent pullback has been driven largely by shifting rate expectations rather than a fundamental change in supply-demand dynamics. For those tracking the market, the live gold price remains the best gauge of sentiment as the Fed decision approaches.
Key takeaways
- Gold traded near $4,290 after a 1% decline to a five-week low.
- Oil supply disruptions from the Middle East have increased expectations of a Fed rate hike this week.
- The 10-year Treasury yield briefly touched 5%, adding pressure on gold.
- Despite near-term headwinds, some investors view gold as a long-term hedge.
Common questions
Why does a Fed rate hike affect gold?
Higher interest rates increase the opportunity cost of holding non-yielding assets like gold, typically weighing on prices. When rates rise, investors can earn more from interest-bearing instruments, reducing the appeal of gold.
What caused the oil disruption?
Saudi Arabia closed its East-West pipeline after attacks, disrupting millions of barrels per day that were being used to bypass tensions in the Strait of Hormuz. The duration of the shutdown remains unclear.
Gold’s direction this week will hinge largely on the Fed’s decision and any signals about the pace of future rate increases. For now, the combination of higher oil prices and rising yields continues to create a challenging environment for the metal.