Gold experienced a downturn, with spot gold falling 1.3% to $4,054.53 per ounce, while silver saw a 2% decrease, settling at $58.77 per ounce. This decline was primarily driven by the breakdown of the ceasefire between the United States and Iran, which heightened concerns about the Strait of Hormuz and its impact on energy prices. Elevated energy prices reinforce expectations that the Federal Reserve will maintain restrictive policies to combat inflation, making gold less appealing to investors.
Expectations for Federal Reserve rate hikes have intensified, with traders now pricing in a 71% chance of an October hike and a 95% chance of an increase in December, according to the CME FedWatch Tool. The probability of a rate hike in the near term now exceeds 30%, up from less than 20% the previous week. New Fed Chairman Kevin Warsh's aggressive stance has been a significant factor, with recent employment data, despite weakening expectations for a short-term cut, still contributing to a "higher for longer" sentiment regarding interest rates. Higher interest rates increase the opportunity cost of holding gold, which offers no yield.
Geopolitical tensions, particularly regarding the Strait of Hormuz, are keeping gold on edge. While some analysts, like Ewa Manthey, commodities strategist at ING Bank, suggest that much of the geopolitical premium is already reflected in gold prices, the ongoing uncertainty around this major energy corridor could increase demand for defensive assets if tensions escalate. Conversely, if diplomatic efforts gain traction, some of the geopolitical support for gold could diminish. Despite the recent fall below $4,000, there are few signs of investors opening large-scale short positions, indicating a degree of caution in the market.
The U.S. 10-year Treasury yield rose to approximately 5.18%, a new 52-week high and the highest since July 6, 2007, while the 30-year yield approached 5.45% to 5.49%, levels last seen in 2004. This rise in yields, coupled with a stronger U.S. dollar, further diminishes gold's attractiveness. Gold is priced in dollars, so a stronger dollar makes it more expensive for buyers using other currencies. The PHLX Gold/Silver Index also closed near 383, well below early September's 410s, reflecting the broader impact on precious metals.
Looking ahead, analysts like Nikos Tzabouras, a senior market analyst at Jefferies-owned Tradu.com, suggest that lingering deficit fears could revive the debasement trend that drives investors toward hard assets like gold. Combined with persistent central bank demand, the precious metal could see a strong fourth-quarter recovery if macro conditions shift. However, for now, the interplay of geopolitical risk and aggressive monetary policy expectations continues to exert downward pressure on gold prices.
