Gold prices edged lower, with spot gold down 0.6% to $4,321.26 per ounce by 0724 GMT, and U.S. gold futures dropping 1.1% to $4,361.20. This decline follows a third consecutive weekly drop for gold. The primary driver behind this downturn is a surge in oil prices, which is stoking inflation concerns and bolstering expectations that the U.S. Federal Reserve will raise interest rates at its policy meeting this week.
Rising energy prices, coupled with climbing rate expectations ahead of the Fed and Bank of Japan meetings, are creating a significant "yield headwind for gold," according to Tim Waterer, chief market analyst at KCM Trade. Although gold is traditionally seen as an inflation hedge, higher interest rates tend to diminish the appeal of the non-yielding bullion. Data released last week showing accelerated U.S. consumer prices in August and the largest increase in four months for underlying inflation reinforced these rate hike expectations.
Traders are now pricing in approximately an 87% chance of a rate hike by the central bank at its meeting on Tuesday and Wednesday, a notable increase from about 67% prior to the inflation data release last week, as indicated by the CME FedWatch Tool. Oil prices jumped over 2% on Monday due to fresh Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf, exacerbating supply concerns following the closure of a key Saudi oil pipeline. The Bank of Japan is also anticipated to raise rates on Friday amid persistent inflation and resilient economic growth.
