Oil-Driven Inflation Threatens Gold As Markets Reprice Fed Rate Path

By Kingsley Ani

Gold came under renewed pressure on Monday as a sharp rise in oil prices intensified inflation concerns ahead of the US Federal Reserve’s policy meeting this week, strengthening expectations that higher interest rates could persist.

DEVELOPMENT:

Spot gold fell 0.3 percent to $4,334.31 per ounce by 0330 GMT, extending a third consecutive weekly decline recorded on Friday. US gold futures also dropped 0.8 percent to $4,375.00.

The immediate pressure came from rising energy prices and stronger expectations of monetary tightening by the Federal Reserve and Bank of Japan (BoJ).

“Gold isn’t finding conditions to its liking. Rising energy prices plus climbing rate expectations ahead of the Fed and BoJ meetings are delivering a clear yield headwind for gold,” said Tim Waterer, chief market analyst at KCM Trade.

“In the meantime, dips should still find buyers as an uncertainty hedge while geopolitics and rate policy remain fluid,” Waterer stated.

DATA:

Markets are pricing an 86.5 percent probability of a US rate hike at the Fed’s Tuesday-Wednesday meeting, up sharply from about 67 percent before last week’s inflation data.

US consumer prices accelerated in August, while a key underlying inflation measure recorded its largest increase in four months.

Oil prices climbed more than two percent on Monday after fresh Houthi strikes on Saudi Arabia and Iranian attacks on Gulf shipping compounded supply concerns following the closure of a key Saudi oil pipeline.

Silver fell 0.7 percent to $64.02 per ounce, while platinum was steady at $1,796.90 and palladium little changed at $1,298.80.

SIGNIFICANCE:

The gold sell-off illustrates the conflict between two traditional market narratives. Gold is normally favoured as an inflation hedge, but rising rates increase the opportunity cost of holding non-yielding bullion.

For investors, the stronger signal is that energy-driven inflation could force major central banks to maintain or intensify restrictive monetary policy, creating further pressure on precious metals.

NEXT MOVE:

The Fed’s rate decision and guidance will be the immediate market catalyst. The BoJ is also widely expected to raise rates on Friday.

Markets will additionally watch oil prices, Middle East tensions and shipping disruptions for evidence that the energy shock is becoming a more persistent inflationary force.

OUR LENS:

Gold’s weakness is increasingly a rates story disguised as an oil story. The latest oil shock is strengthening inflation expectations just as central-bank decisions come into focus. Unless geopolitical uncertainty overwhelms the yield effect, bullion could remain caught between its safe-haven appeal and the rising cost of holding an asset that generates no income.

Kingsley Ani is a journalist who has over the years been covering capital, markets, corporate results, economic and public-interest developments with a focus on clear, factual reporting.