Gold falls toward two-week low as oil shock revives expectations of a Fed rate hike

Gold fell toward its lowest level in almost two weeks on Monday as the latest escalation in the Middle East drove oil prices higher and strengthened expectations that the US Federal Reserve could raise interest rates in September.

Spot bullion declined by about 0.5% to approximately €3,824 per ounce during the New York session. US gold futures for December delivery fell 1.1% to around €3,865 per ounce.

The movement illustrates the competing forces currently affecting the precious-metal market. Renewed military tension can encourage investors to seek gold as a defensive asset, but the resulting increase in energy prices can also revive inflation and force central banks to keep monetary policy restrictive.

In Monday’s session, the second effect prevailed.

US crude rose above €73.70 per barrel, while Brent approached €77.90, after the United States and Iran exchanged attacks for the first time in approximately a month.

The confrontation included US strikes against Iranian positions near the Strait of Hormuz and retaliatory attacks against American forces in the region. The waterway remains central to global energy markets because a substantial share of internationally traded oil passes through it.

Any threat to shipping or production in the area can therefore produce an immediate increase in crude prices. Higher oil costs can then spread through transport, manufacturing and consumer prices, complicating the effort to return inflation to central-bank targets.

That mechanism changed the market’s interpretation of geopolitical risk. Instead of buying gold exclusively as a haven, investors increased their expectations of tighter monetary policy.

Futures markets assigned a probability of more than 60% to a Federal Reserve rate increase in September, compared with approximately 36% before the latest repricing.

The shift followed comments by Fed chair Kevin Warsh at the Jackson Hole symposium, where he indicated that further tightening could be required if inflation failed to return sustainably towards the central bank’s target.

The rise in oil prices provided an additional reason for traders to consider that scenario. The yield on the ten-year US Treasury approached 4.76%, increasing the relative appeal of interest-bearing assets.

Gold does not pay interest or dividends. When bond yields rise, investors face a higher opportunity cost for holding bullion, particularly if monetary policy is expected to remain restrictive for longer.

The impact of rates outweighed a modest decline in the US dollar during the session. A weaker dollar normally supports gold by making the metal less expensive for buyers using other currencies, but the movement was insufficient to counter the rise in yields.

The decline did not erase gold’s strong performance during August. The metal gained close to 10% over the month, placing it on course for its best monthly result since January.

That advance had been supported by several factors, including central-bank purchases, uncertainty surrounding the US fiscal outlook, earlier expectations of less restrictive monetary policy and renewed demand for protection against currency depreciation.

The US Treasury’s plan to increase bond buybacks also contributed to what market participants describe as the “currency-debasement trade”: demand for scarce or alternative assets from investors concerned about the long-term purchasing power of conventional currencies.

The Treasury and the Federal Reserve are now sending different signals to the market. Measures intended to improve bond-market liquidity and manage government financing can support demand for gold, while tighter monetary policy and higher yields move in the opposite direction.

This tension may keep bullion volatile during September.

Structural demand nevertheless remains in place. Central banks purchased a record 289 tonnes of gold during the second quarter, as reserve managers continued diversifying away from traditional currencies and sovereign debt.

A World Gold Council survey published earlier this year found that 45% of participating central banks expected to increase their gold reserves. Purchases by monetary authorities provide a source of demand less sensitive to short-term movements in interest rates than private investment flows.

Other precious metals also came under pressure on Monday. Silver slipped to approximately €57.17 per ounce, while platinum declined about 2% and palladium lost more than 4%.

The larger decline in platinum-group metals reflected their greater exposure to industrial demand. Unlike gold, platinum and palladium are heavily influenced by expectations for automobile production, manufacturing activity and global growth.

The energy shock also affected European markets. The STOXX Europe 600 declined 0.6%, while Germany’s DAX fell 1.2% after German inflation accelerated to 2.9% in August, partly because of higher energy costs.

European bond yields increased as markets moved closer to pricing another European Central Bank rate rise. The expected increase in euro-area inflation has created a similar problem for policymakers on both sides of the Atlantic: tightening monetary policy can reduce price pressures but also weakens investment and economic activity.

For gold, the next direction will depend on whether investors give greater weight to geopolitical protection or to the effect of higher interest rates.

A further escalation around the Strait of Hormuz could support safe-haven purchases. However, if it keeps oil prices elevated and reinforces expectations of rate increases, bond yields may continue limiting the metal’s recovery.

The market will now focus on the forthcoming US employment report and additional inflation indicators. Weaker labour data could reduce the probability of a September increase, while resilient employment or persistent inflation would strengthen the case for tighter policy.

Gold’s August rally demonstrates that investors continue to seek protection against fiscal, monetary and geopolitical uncertainty. Monday’s decline, however, shows that not every international crisis produces an immediate rise in bullion.

When geopolitical tension raises energy prices, inflation expectations and interest rates at the same time, the usual safe-haven relationship can temporarily reverse. Gold then has to compete with higher-yielding assets even as the risks that normally support it continue to increase.