TLDR
- Gold fell 0.6% to $4,271 an ounce, hitting a five-week low
- Oil prices jumped after Saudi Arabia shut its east-west pipeline due to Houthi militant attacks
- Markets now price a 92% chance of a Fed rate hike at Wednesday’s meeting, up from 59% a week ago
- U.S. 10-year Treasury yields climbed above 5%, their highest in nearly two decades
- Higher rates and a stronger dollar both pressure gold, which pays no interest
Gold prices dropped sharply on Tuesday, falling below $4,300 an ounce as rising oil prices stoked inflation fears ahead of a key Federal Reserve decision.
Spot gold fell 0.6% to $4,271.32 an ounce. Gold futures dropped 1.0% to $4,310.90 an ounce in early trading.
The metal had already hit a five-week low on Monday. The slide continued Tuesday as energy markets added more pressure.
Oil Disruption Drives Inflation Fears
Saudi Arabia shut its east-west pipeline after Iran-backed Houthi militants in Yemen attacked it. The 1,200-kilometer pipeline is expected to be offline for three to five weeks while repairs are made, including at a key pumping station.
The pipeline had been carrying between 2.6 million and 4 million barrels per day since late August. Traders say a prolonged shutdown could disrupt as much as 4% of global oil supply.
Brent crude climbed 2% to $107.70 a barrel following the news. The disruption comes after the Strait of Hormuz was effectively closed earlier this year, making the pipeline a critical route for Saudi oil exports.
With energy costs rising, traders are worried inflation could stay high or move higher. That raises the pressure on the Federal Reserve to act.
Fed Rate Hike Now Seen as Near Certain
Markets are now pricing in a 92% chance of a rate hike at the Fed’s Wednesday meeting. That is up sharply from 59% just one week ago, according to CME FedWatch data.
U.S. 10-year Treasury yields have climbed above 5%, their highest level in nearly 20 years. The U.S. dollar has also strengthened.
Both of those factors hurt gold. Gold pays no interest, so higher rates make it less appealing compared to yield-bearing assets. A stronger dollar also makes gold more expensive for buyers using other currencies.
Lukman Otunuga, Head of Market Research at FXTM, said markets are heading into a week where oil, central banks, and yields could all push in the same direction. He said the key question is whether policymakers confirm or push back on those expectations, and that the answer will likely drive the next big move in currencies, equities, and gold.
ANZ analysts also noted that tightening oil supplies are reinforcing expectations for rate hikes, adding more weight to gold’s decline.
Gold futures were last trading at $4,331.20 a troy ounce in European morning trade, down 0.5% on the day.
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