Gold prices fell on Monday as traders increasingly bet that the US Federal Reserve will raise interest rates at its policy meeting later this week. Spot gold declined 0.9% to $4,308.24 per troy ounce by 0907 GMT, extending recent losses. The move came after data on Friday showed US consumer prices accelerated in August, reinforcing expectations that the central bank will tighten monetary policy.
Rate hike odds jump after inflation data
According to the CME FedWatch Tool, traders now see an 89% chance of a rate hike at the Fed's two-day meeting that begins on Tuesday. That is up sharply from 67% before the inflation figures were released. Major banks including Goldman Sachs and HSBC expect the Fed to raise its benchmark rate by 25 basis points.
Higher interest rates tend to reduce the appeal of gold because the metal pays no yield. When rates rise, the opportunity cost of holding bullion increases, often prompting investors to shift into assets that offer income.
Oil and dollar add to pressure
Oil prices rose about 3% on Monday after fresh strikes on Saudi energy infrastructure and Iranian attacks on ships in the Gulf compounded supply worries. The renewed climb in crude prices could keep inflation elevated and maintain the Fed's hawkish stance, said UBS analyst Giovanni Staunovo.
The US dollar also firmed, reaching a more than one-week high. A stronger dollar makes gold, which is priced in dollars, more expensive for buyers using other currencies, further weighing on demand.
Broader precious metals decline
Other precious metals followed gold lower. Spot silver slid 1.9% to $63.22 per ounce, while platinum and palladium each dipped 1.4% to $1,770.82 and $1,280.97 respectively.
Looking ahead, the Bank of Japan is also expected to raise interest rates on Friday, amid rising energy prices and continued Middle East tensions. Diplomacy in the region appeared to falter on Monday with the postponement of a meeting between Iran and other Gulf powers.
Key takeaways
- Spot gold fell 0.9% to $4,308.24 by 0907 GMT on Monday.
- Traders see an 89% chance of a Federal Reserve rate hike this week, up from 67% before last week's inflation data.
- Hot US consumer price data and rising oil prices reinforced expectations of higher interest rates.
- Other precious metals also declined, with silver down 1.9% and platinum and palladium each down 1.4%.
Common questions
Why does gold fall when interest rates rise?
Gold is a non-yielding asset, meaning it does not pay interest or dividends. When interest rates rise, the opportunity cost of holding gold increases because investors could earn a return from other assets such as bonds or savings accounts. This often reduces demand for gold and pushes its price lower.
What is the CME FedWatch Tool?
The CME FedWatch Tool is a market-based indicator that uses prices from fed funds futures contracts to estimate the probability of Federal Reserve interest rate changes at upcoming meetings. It is widely followed by traders and analysts to gauge market expectations for monetary policy.
Gold prices remain sensitive to shifts in interest rate expectations and currency moves. For the latest price, check the live gold price.