Gold experienced a decline, hovering around $4,265 an ounce after a more than 2% drop the previous week. Spot prices were down 0.5% at $4,261.59 an ounce in early trading on Monday. This month, gold has traded in a narrow corridor between $4,230 and $4,510, significantly below its January peak of nearly $5,600. The drop is largely attributed to elevated energy costs and increased likelihood of further Federal Reserve rate hikes.
Oil prices climbed as Iran refused to ease terms for reopening the Strait of Hormuz after President Donald Trump rejected a seven-day proposal, although he expects talks to resume this week. The U.S.-Iran conflict is now in its eighth month, with Brent crude up 70% this year. This sustained increase in oil prices contributes to inflation concerns, pressuring the Fed to maintain a tighter monetary policy. The Bloomberg Dollar Spot Index also rose by 0.1% on Monday, adding to the headwinds for precious metals.
Investors are now placing approximately 65% odds on an October Fed rate hike, following a unanimous quarter-point increase earlier in the month. Cleveland Fed President Beth Hammack indicated that rising long-term Treasury yields reflect a sturdier growth outlook, concerns about government debt, and expectations of more rate increases. Higher interest rates make non-yielding assets like gold less attractive. The 10-year minus 2-year Treasury spread compressed to 17 basis points last week, signaling potential recession risk.
Other precious metals also saw declines, with silver slipping 0.8% to $63.77 after a 3% weekly drop, and platinum and palladium also edging lower. Despite the price volatility, dealmaking in the gold sector continues, as evidenced by Gold Fields Ltd.'s rejected acquisition bid for Northern Star Resources Ltd. With persistent oil strength, a stronger dollar, and the Fed's hawkish stance, gold's narrow trading range is expected to continue, leading to short bursts of volatility as markets adjust to inflation and interest rate outlooks.
