Gold falls below $4,100: How is the Middle East energy shock reinforcing the hawkish Fed outlook?

Demand for Gold weakens on expectations of prolonged high interest rates, sending prices below $4,100.
A pause at next week's Fed meeting is expected by markets, followed by another rate increase in December.
Demand for government bonds accompanies a further retreat in the US Dollar and Treasury yields from their recent peaks.

Buying interest in Gold (XAU/USD) remains subdued on Thursday, with prices dropping below $4,100 even as the US Dollar (USD) weakens and US Treasury yields decline. Fears of energy-led inflation linked to Middle East tensions are strengthening expectations of an extended period of high interest rates. XAU/USD is trading near $4,078 at the time of writing, a daily decline of 1.50%.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

According to The New York Times, plans for fresh strikes on Iran following the US midterm elections have been prepared by the United States (US) and Israel. The country's energy infrastructure could be among the targets.

At the same time, fresh reports of attacks on Saudi Arabia's Shaybah oil field and King Fahd International Airport come as tensions between Saudi Arabia and the Houthis intensify. Non-emergency government employees and their family members have also been ordered to leave Saudi Arabia by the US State Department.

Oil prices have moved higher as the latest geopolitical developments fuel fears of additional disruption to Middle East energy supplies. Trading close to five-week highs, West Texas Intermediate (WTI) crude is recovering towards $100, with a daily gain of 1.40%.

Across major economies, central banks have responded with higher borrowing costs as the persistent energy shock lifts inflation beyond their targets. Despite Gold's established role as a safe-haven asset and a hedge against inflation, higher interest rates make the non-yielding metal less attractive. A more prolonged conflict may therefore require central banks to maintain restrictive monetary policy for longer.

Attention now turns to next week's Federal Reserve (Fed) meeting. Following September's increase of 25 basis points (bps), the US central bank is widely expected to keep interest rates steady. With traders pricing in another increase in December, guidance on the Fed's rate trajectory will be closely scrutinised. The CME FedWatch Tool puts the probability of that hike at 89%.

For now, however, the US Dollar and Treasury yields are drawing little support from these hawkish expectations. Both are retreating from recent peaks as unease over AI-related investments pressures equities and encourages demand for government bonds.

After touching 101.45, its lowest level in three weeks, the US Dollar Index (DXY) is trading near 101.66. The index measures the Greenback's performance against a basket of six major currencies. Meanwhile, the benchmark 10-year US Treasury yield is around 5.06%, a decline of 1% on the day.

Interest rate expectations and changes in Oil prices are likely to remain key influences on Gold. Nevertheless, a weaker US Dollar and lower Treasury yields could limit the extent of further losses.

Gold: Common Questions

What makes Gold attractive to investors?

Widely used both to preserve wealth and to facilitate exchange, Gold has occupied an important place throughout human history. Today, its appeal extends beyond its lustre and use in jewellery: investors broadly regard the precious metal as a safe-haven asset, or a suitable investment during periods of uncertainty. Because it is not dependent on any particular issuer or government, Gold is also widely considered a hedge against inflation and currency depreciation.

Which buyers hold the largest Gold reserves?

The largest holders of Gold are central banks. To support their currencies during unsettled periods, they typically diversify reserves and purchase Gold, helping strengthen perceptions of their economies and currencies. Substantial Gold holdings can bolster confidence in a country's ability to meet its financial obligations. World Gold Council data show that central banks increased their reserves by 1,136 tonnes of Gold, valued at around $70 billion, in 2022. No other year on record has seen purchases this high. Emerging-economy central banks, including those in China, India and Turkey, are rapidly expanding their Gold holdings.

How does Gold move relative to other assets?

Both the US Dollar and US Treasuries are leading reserve and safe-haven assets, and Gold has an inverse correlation with them. A weakening Dollar generally accompanies a rise in Gold, allowing investors and central banks to spread their holdings across assets during turbulent periods. The metal also tends to move in the opposite direction to risk assets. Stock-market advances usually put pressure on Gold prices, whereas selling in riskier markets generally supports the precious metal.

Which factors influence Gold prices?

A variety of influences can drive Gold prices. Its safe-haven appeal means geopolitical unrest or concerns about a severe recession can trigger a rapid rise. Lower interest rates generally support Gold because it offers no yield, while a higher cost of borrowing usually puts the metal under pressure. Even so, movements in the US Dollar (USD) account for much of the price action, since Gold is quoted in dollars (XAU/USD). Dollar strength typically restrains Gold prices; a softer Dollar, by contrast, is likely to lift them.