Gold edges lower to near $4,350 on Fed hawkish stance, Middle East tensions

Gold prices dipped near $4,365 during the early Asian session on Monday, as tensions in the Middle East and hawkish remarks from Federal Reserve officials dampened momentum. Governments in the Middle East anticipated escalating violence following Iran's claim of receiving intelligence about a potential renewed bombing campaign against the Islamic Republic.

This rising tension could elevate oil-driven inflation concerns, putting downward pressure on gold prices. The Federal Reserve increased interest rates by a quarter of a percentage point to the 3.75%-4.0% range last week and indicated more rate hikes in the coming months. Currently, traders estimate a 56.5% probability of another US rate hike during the October meeting, according to the CME FedWatch tool.

Higher interest rates generally weaken gold, as it does not yield interest and makes yield-bearing assets more attractive. Fed officials such as Kansas City Fed President Jeffrey Schmid and Minneapolis Fed President Neel Kashkari expressed support for the rate hike, citing inflation trends above 3% and emphasizing the need for further tightening.

Strategists at OCBC noted that "near term, elevated yields and a firmer USD may continue to cap gold," but emphasized that further medium-term cases remain viable with a hawkish rate path already priced in. Fed's Schmid's speech, rated 8/10 on the FXS Speechtracker, signaled a firmer tightening bias, deepening hawkish sentiment in markets.

With the Fed Sentiment Index at 152.09, markets anticipate reduced probability of near-term cuts and a stronger Dollar, particularly against the Euro and Yen. Gold's price is currently above the 100-day simple moving average ($4,320) and near the Bollinger middle band ($4,410), supported by a constructive near-term bias. Should the price close above $4,410, the next resistance zone lies at $4,615.

In times of geopolitical instability or recession fears, gold typically appreciates due to its safe-haven status, while yield-less assets like gold benefit from lower interest rates. Central banks, particularly in emerging economies, are adding significant amounts of gold to their reserves as a hedge against currency depreciation.