Gold prices fell sharply on Monday, sliding below $4,200 an ounce as rising oil prices, a firmer dollar and another push higher in US bond yields strengthened expectations that the Federal Reserve may keep tightening policy.
Spot gold was down 2.1% at $4,198.10 an ounce by 0357 GMT, while US gold futures fell 2.1% to $4,231.
The move put bullion on course for its steepest daily decline since September 1 and extended the pressure that pushed it lower last week.
Oil turns inflation hedge into a rates problem
Gold would normally benefit from an oil-driven inflation scare. This time investors are treating higher energy costs as a reason for the Fed to remain hawkish.
Brent crude climbed back above $106 a barrel after US President Donald Trump rejected an Iranian proposal to reopen the Strait of Hormuz and end the conflict, keeping supply concerns elevated.
Trump rejected the proposal over the weekend, although further talks were still expected.
The Fed lifted its benchmark rate by 25 basis points earlier this month to 3.75%-4.00%. Futures markets were pricing about a 68% chance of another increase in October on Monday.
That combination is difficult for bullion. Higher oil supports the inflation-hedge argument, but higher policy rates and bond yields increase the opportunity cost of holding an asset that pays no income.
Higher real yields keep $4,200 in focus
The pressure is particularly visible in the bond market. US 10-year yields were around 5.2% late last week, close to a two-decade high, while long-dated yields remained elevated.
Barbara Lambrecht, commodity analyst at Commerzbank, told Kitco News that earlier-than-expected Fed tightening was lifting both nominal and real yields, increasing the cost of holding gold.
She added that longer-term ETF investors had so far remained committed, limiting the risk of a deeper correction.
That leaves the $4,200 area as an important near-term test. OCBC strategists said in a note carried by FXStreet that persistent weakness below the $4,300-$4,354 resistance zone could expose support around $4,200 and then $4,000.
This week’s US data could decide whether that support holds. Investors are due to get job openings, ADP employment figures, the PCE inflation gauge and Friday’s nonfarm payrolls report.
Structural demand has not disappeared
The current selloff has not erased the longer-term demand story.
World Gold Council data show global gold-backed ETFs attracted $18 billion in August, the second-largest monthly inflow on record.
Holdings rose by 121 tonnes to a record 4,189 tonnes, while assets under management reached $615 billion.
Suki Cooper, global head of commodities research at Standard Chartered, told Kitco News last week that higher US rates could keep gold volatile in the short term, but structural forces including de-dollarisation, currency concerns and policy uncertainty were providing support.
Other precious metals also sold off on Monday. Silver fell 3.4% to $62.08 an ounce, platinum dropped 2.7% to $1,730.78 and palladium declined 2.8% to $1,231.46.
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