Gold prices fell more than 1% on Monday, with spot gold down 1.5% at $4,223.95 per ounce and US gold futures dropping 1.5% to $4,257.90. This decline was attributed to elevated oil prices, which fueled inflation concerns and reinforced expectations for additional Federal Reserve interest rate hikes. Analysts like Tim Waterer of KCM Trade noted that the combination of high bond yields and rising oil prices is weighing on gold.
The increase in oil prices stemmed from uncertainty surrounding the Strait of Hormuz, with Iran insisting on diplomatic solutions while US President Donald Trump rejected a proposal to reopen the waterway. This geopolitical tension pushed oil prices up by more than 1%, contributing to inflation fears. Higher energy costs typically drive inflation, which paradoxically hurts gold despite its traditional role as an inflation hedge, because a high interest rate environment increases the opportunity cost of holding the non-yielding metal.
Investors are closely monitoring upcoming US labor market and inflation data, including job openings, the ADP employment report, the Personal Consumption Expenditures (PCE) price index, and nonfarm payrolls. Stronger-than-expected figures in these reports could further push up bond yields and negatively impact gold prices. Cleveland Fed President Beth Hammack expressed concern about persistently high inflation potentially normalizing elevated prices, signaling the central bank's commitment to controlling it.
The Fed had already raised rates earlier in the month by a quarter percentage point, setting its target range between 3.75% and 4%. Traders are currently pricing in a 66% chance of another US rate hike in October, according to CME's FedWatch Tool. The structural demand from central banks, which have been consistent net purchasers of gold, is seen as providing a floor for the market, although short-term flows are aligning with the interest rate argument.
