(Bloomberg) — Gold fell as continued disruptions to oil supplies from the Middle East reinforced bets on a series of Federal Reserve rate hikes this year.
Bullion fell as much as 1.1% to trade just above $4,300 an ounce. Benchmark crude futures advanced to trade near $108 a barrel following Saudi Arabia’s closure of the East-West pipeline, which has been key to bypassing the Strait of Hormuz during the US-Iran war. A gauge of the US dollar also gained Monday, a headwind for bullion.
The expectation that higher energy prices will trickle into core inflation has piled pressure on the Fed to make its first rate increase in three years, with traders pricing in an almost 90% chance of it happening. Higher borrowing costs are typically negative for gold, which doesn’t pay interest.
Underlying inflation rose in August as the core consumer price index, which excludes food and energy costs, increased 0.3% from a month earlier, data released on Friday showed. Gold ended that session higher, but was still down 1.8% for the week.
The market has largely priced in the risk of a rate hike this week, but gold still faces further headwinds if it materializes, said Yuxuan Tang, Asia head of rates & FX strategy at JPMorgan Private Bank. “By contrast, a hold, hawkish or dovish, would likely push real yields lower and reignite concerns about policy credibility and currency debasement, which should be supportive for gold.”
Gold has most traded around $4,400 an ounce since bouncing from a floor near $4,000 an ounce in early August, as traders repeatedly recalibrate the outlook for Fed policy. Despite the near-term headwinds, many investors are still betting that bullion will grind higher as it rediscovers its traditional value as a portfolio hedge.
Bullion will remain well-supported in the medium term even if the Fed hikes, JPMorgan’s Tang said. Monetary tightening “would add pressure to parts of the economy that are already struggling with elevated energy costs and risk a widened K-shaped growth trajectory,” increasing recession risk that will be positive for gold, she said.
Spot gold fell 0.9% to $4,310.64 an ounce at 10:01 a.m. in London. Silver fell 1.8% to $63.32 an ounce. Platinum and palladium fell. The Bloomberg Dollar Spot Index, a gauge of the US currency, was 0.4% higher.
–With assistance from Wendy Wells.
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