Gold slides to six-week low on US rate expectations

Gold prices fell in European trading on Monday, resuming losses that were temporarily halted on Friday and hitting their lowest level in six weeks, pressured by a stronger US dollar and rising US Treasury yields ahead of the Federal Reserve’s policy meeting.

Markets are currently pricing in an 86% probability that the US central bank will raise interest rates by 25 basis points this week to counter mounting inflationary pressures in the United States.

The Price

• Gold prices fell around 1.1% to $4,280.60, their lowest level since August 7, from an opening price of $4,349.00, while recording a high of $4,355.45.

• At Friday’s settlement, gold prices rose 0.75% in a brief rebound after suffering a loss of around 1.9% the previous day.

• Gold lost 1.85% last week, marking its third consecutive weekly decline, pressured by US interest rate expectations.

US dollar

The US Dollar Index rose 0.5% on Monday, hitting a two-week high of 99.59 points, reflecting broader gains in the US currency against a basket of global currencies.

As is widely known, a stronger US currency makes dollar-denominated gold bullion less attractive to buyers holding other currencies.

The dollar’s advance comes amid increased demand for the US currency as a preferred alternative investment as geopolitical tensions escalate in the Middle East, as well as continued gains in US Treasury yields.

US Treasury yields

The yield on the 10-year US Treasury note rose 0.3% today, extending its gains for a sixth consecutive session and approaching a three-year high near the 5% threshold, providing further support for the US dollar.

Global oil prices

Oil prices rose more than 3% on Monday, approaching their highest levels in four months after a new Houthi attack targeted oil facilities in Saudi Arabia, renewing concerns over the security of global oil supplies.

Federal Reserve

The Federal Reserve begins its monetary policy meeting on Tuesday, with its decision due on Wednesday. Expectations strongly favor a 25-basis-point interest rate hike, which would be the first increase in US interest rates since July 2023, while investors will also look for further clues on the evolution of inflation and the path of interest rates in the coming period.

US interest rates

• Data released last week showed that US consumer prices accelerated in August, while a key measure of core inflation recorded its largest increase in four months.

• Following the data, according to the CME FedWatch Tool, the probability of the Federal Reserve leaving interest rates unchanged at its September meeting fell from 28% to 14%, while the probability of a 25-basis-point rate hike rose from 72% to 86%.

• The probability of the Federal Reserve leaving interest rates unchanged at its December meeting fell from 6% to 2%, while the probability of a 25-basis-point rate hike rose from 94% to 98%.

Gold outlook

“Gold is not finding conditions particularly favorable. Rising energy prices and growing interest rate expectations ahead of the Federal Reserve and Bank of Japan meetings are creating a clear headwind for gold because of their impact on yields,” said Tim Waterer, chief market analyst at KCM Trade.

“Meanwhile, any price declines are likely to attract buyers seeking a hedge against uncertainty, given the persistence of geopolitical volatility and the lack of clarity over the future path of interest rates,” Waterer added.

SPDR Fund

Gold holdings at the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell by around 2.84 metric tons on Friday, marking a second consecutive daily decline and bringing total holdings down to 1,047.43 metric tons, the lowest level since September 1.