Gold steadies as markets weigh rates and Mideast

Gold prices remained relatively stable on Monday, hovering near a one-week high as investors weighed concerns over Middle East tensions against expectations that U.S. interest rates might remain high for longer. Spot gold was nearly unchanged at around $4,379.74 per ounce in early trading, while U.S. gold futures for December delivery slipped 0.1% to $4,419.40.

The metal had surged to a one-week peak on Friday following a drop in oil prices and a moderation in inflation concerns. However, trading in gold remained sensitive to developments in the Middle East, where conflicts between the United States and Iran, as well as attacks on regional energy infrastructure, kept investors focused on the risk of renewed oil-price pressure.

While gold is often seen as a safe-haven asset during periods of geopolitical stress, higher energy costs can also fuel inflation expectations and support tighter monetary policy, creating a balancing act for bullion prices. Oil prices declined on Monday, despite ongoing regional tensions, with Brent crude falling roughly 2% in Asian trading and hovering near $102 a barrel.

This drop in oil prices helped ease some inflation concerns, although U.S. bond markets continued to reflect expectations of additional monetary tightening. The Federal Reserve had raised its benchmark rate by 25 basis points on September 16, to 3.75% to 4%, marking its first increase since 2023. The move followed persistent inflation pressures and suggested that borrowing costs could remain restrictive.

Higher interest rates typically weigh on gold, as the metal pays no interest, increasing the opportunity cost of holding it compared to interest-bearing assets. However, lower long-term yields and ongoing demand for protection against geopolitical and inflation risks partially offset this pressure. Gold had gained over 1% on Friday, with spot prices nearing $4,390 an ounce, as falling crude prices reduced fears of an energy shock that could force the Federal Reserve into more aggressive tightening.

The U.S. dollar remained strong on Monday after surging to a seven-week high the previous week, making gold more expensive for buyers in other currencies and potentially limiting upside in bullion prices. Investors are also closely monitoring diplomatic activity at the United Nations General Assembly in New York, where the Middle East conflict, energy security, and the U.S.-Iran confrontation are expected to be major topics.

Any shifts in the risk of further escalation could quickly impact oil prices, inflation expectations, Treasury yields, and precious metals. The Strait of Hormuz shipping conditions remained a key focus, with vessel traffic significantly lower than pre-conflict levels, although Gulf producers' crude exports have continued. Saudi Arabia's crude exports had recovered from August lows, helping reduce fears of an immediate supply squeeze.

This improvement in oil flows contributed to declining oil prices, but traders remained cautious due to the potential for sudden changes in energy supply caused by shipping disruptions and attacks on infrastructure. Other precious metals also gained in early trade, with spot silver rising 0.8% to $66.76 an ounce, platinum increasing 0.2% to $1,804.33, and palladium adding 0.7% to $1,311.65.

The dollar index remained relatively flat near 100.23, highlighting the competing forces facing gold: a strong U.S. currency and higher short-term yields on one side, and haven demand linked to geopolitical uncertainty on the other. Market pricing indicated approximately a 55% probability of another Federal Reserve rate increase in October.