- Iran’s allies attacked a major oil pipeline in Saudi Arabia.
- Major central banks have pivoted to assume more hawkish stances, hurting gold.
- Market participants are pricing a 90% chance of a Fed rate hike.
Gold prices edged lower on Tuesday as traders awaited a likely rate hike during the FOMC meeting set for Wednesday. Rate hike expectations have risen significantly in the past week due to a surge in oil prices. The tensions in the Middle East have caused inflation worries, putting most major central banks on high alert.
Spot gold (Source: Bloomberg)
During times of uncertainty, investors rush to safe-haven assets like gold, the dollar, and the yen. However, for the yellow metal, its safe haven appeal drops significantly when interest rates are rising. The opportunity cost of holding the non-yielding metal increases, sending traders to yielding assets.
In September, the tensions in the Middle East escalated, causing economic uncertainty in the global markets. The war between the US and Iran continues with no end in sight. At the same time, other countries like Saudi Arabia have been dragged into the conflict.
Iran’s allies have attacked targets in Saudi Arabia, with the most recent being a major oil pipeline that bypasses the Strait of Hormuz. The country had to close the pipeline due to the damage after drone attacks. The destruction of energy facilities has clouded the outlook for oil supply, sending prices higher.
As oil increases, it fuels inflation in the global economy. Consequently, major central banks like the European Central Bank, the Federal Reserve, and the Bank of Japan have pivoted to assume more hawkish stances.
The ECB raised rates by 25 basis points last week. Moreover, the central bank hinted at more hikes in the future if inflation remains a problem. Market participants are pricing a 90% chance that the Fed will hike later in the day. A hawkish tone during the meeting will support the dollar and Treasury yields. A strong dollar also makes gold more expensive, hurting demand.
“Higher energy prices cause more inflation. More inflation could cause higher interest rates. That’s not good for gold … gold is in a kind of a range-bound area. It could actually sell off more if rates continue to move higher,” said Daniel Pavilonis, senior market strategist at StoneX.
Finally, the Bank of Japan is set to hike its key rate on Friday. With rates rising across the globe, demand for gold could keep dropping.
