Gold slips as oil rally fans rate hike bets ahead of Fed meeting

Gold prices declined on Monday as soaring oil prices fueled inflation concerns, increasing the likelihood that the US Federal Reserve might raise interest rates during its upcoming policy meeting. Spot gold fell 0.3% to $4,334.31 per ounce by 0330 GMT, following a third consecutive weekly drop on Friday. US gold futures decreased 0.8% to $4,375.00.

Analyst Tim Waterer of KCM Trade noted that gold is facing unfavorable conditions due to rising energy prices and heightened expectations of rate hikes ahead of the Fed and BOJ meetings. He added that dips could still attract buyers as a hedge against uncertainty while geopolitical tensions and monetary policy remain uncertain. Inflation data from last week indicated a surge in US consumer prices in August, with underlying inflation rising to its highest level in four months.

Traders now estimate an 86.5% probability of a US rate increase at the central bank's meeting on Tuesday and Wednesday, up from around 67% prior to the inflation data, according to the CME FedWatch Tool. The BOJ is also expected to raise rates on Friday, as persistent inflation and strong economic growth suggest more rate hikes by major central banks, driven by rising energy prices and little progress in easing Middle East tensions.

While gold is traditionally viewed as an inflation hedge, higher interest rates generally diminish the appeal of non-yielding bullion. Oil prices surged over 2% on Monday following new Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf, exacerbating supply worries after the closure of a crucial Saudi oil pipeline.

Diplomatic efforts in the Middle East appeared to stall after a planned meeting between Iran and other Gulf states was postponed. Silver prices dropped 0.7% to $64.02 per ounce, platinum stabilized at $1,796.90, and palladium remained unchanged at $1,298.80.