Gold Holds Decline as Mideast Tensions Bolster Rate-Hike Case

Gold experienced a three-day decline as fresh attacks on ships in the Middle East heightened inflationary risks and increased the likelihood of a US interest rate hike. The precious metal traded near US$4,350 an ounce, having dropped 2.6% over the previous three sessions. The US military destroyed five Iranian tankers carrying crude near Kharg Island, their primary oil export hub, in response to attempted missile attacks on a US warship.

This action raised concerns about an escalation in the ongoing conflict and unsettled energy markets. Oil prices surged, with benchmark Brent crude nearing US$100 a barrel, bolstering arguments for a rate hike less than a week before the US Federal Reserve's meeting on September 14-15. Traders are closely monitoring key inflation prints expected this week for further indications of the central bank's next move.

Ahmad Assiri, a market strategist at Pepperstone Group, noted that "a softer reading will be a relief for gold traders" as it would support the case for maintaining current interest rates. Conversely, an unexpected surge in inflation could strengthen the case for a rate hike, potentially exerting significant pressure on gold, which typically suffers from tighter monetary policy.

Swaps traders priced in a 60% chance of a Fed rate increase in September. Since rising from a low near US$4,000 an ounce in July, gold has oscillated around US$4,400, as traders continually reassess the outlook for Fed policy. Despite short-term challenges, many investors remain optimistic that gold will gradually climb as it once again proves its worth as a portfolio hedge.

Assiri explained, "For now, gold's low-volatility consolidation near US$4,400 resembles a market awaiting clarity to determine its future direction." Spot gold slipped 0.1% to US$4,352.14 an ounce at 7.16 am in Singapore, while silver declined 0.2% to US$65.63 an ounce. Platinum remained flat, while palladium experienced a drop. The Bloomberg Dollar Spot Index, a measure of the US dollar, saw a 0.1% decrease.