Gold declines with expectations of Fed tightening and oil rises amid geopolitical tensions

Gold prices moved in a narrow range, Thursday, under pressure from expectations that the US Federal Reserve will continue to tighten its monetary policy, while the decline in oil prices provided some support for the precious metal.

Spot gold fell 0.1 percent to $4,281.98 per ounce by 01:55 GMT, while US gold futures for December delivery settled approximately at $4,317.50.

Ross Maxwell, chief strategy officer at VT Markets, said that investors are currently focusing on the Federal Reserve’s trend towards keeping interest rates high for a longer period, after raising them last week, in addition to the movements of the dollar and Treasury bond yields, and developments in the Middle East related to the risks of oil and energy supplies.

He added that the emergence of clearer indications of another hike in interest rates will put additional pressure on gold.

Oil prices fell marginally after Iran announced that it was still open to diplomacy to end the war with the United States, despite the continued disagreement between the two countries over ways to reach an agreement.

Last week, the Federal Reserve raised the base interest rate by 25 basis points to a range between 3.75 and 4.00 percent. It appears that escalating inflation pressures and the continued strength of the economy are pushing the central bank towards another interest rate hike, with traders increasing their bets on tightening monetary policy for the second time in a row in late October.

Gold is usually seen as an inflation hedge, but high interest rates reduce its attractiveness compared to yield-generating investments.

Data released on Wednesday showed that corporate activity in the United States accelerated to its highest level in more than five years during September, but strong demand led to increased pressure on supply chains and pushed prices to rise.

Daniela Corsini, an economist at Intesa San Paolo, said in a note that the bank’s basic scenario expects precious metals to lack a clear trend, with volatility remaining high, suggesting that gold will continue to trade for approximately two quarters near an average of $4,200 per ounce.

In other precious metals markets, the spot price of silver fell 0.6 percent to $64.07 per ounce, while platinum rose 0.2 percent to $1,754.05, and palladium fell 0.1 percent to $1,260.70.

The US Treasury announced that it will buy up to $6 billion of bonds maturing over a period ranging between 20 and 30 years, in the repurchase process scheduled for Thursday, maintaining the target level in the last long-term debt repurchase process.

The operation comes after the Treasury purchased $5.2 billion of bonds with maturities ranging between 10 and 20 years in the first operation to buy back long-term debt since its surprise announcement on August 19 that it would at least double the size of these operations.

The value of previous purchases was below the target of $6 billion, an indication of the limited volume of bonds that investors were prepared to sell at the prices prevailing in the market at the time.

Bonds with a maturity between 20 and 30 years are expected to attract greater offers from investors compared to shorter-term bonds. Which may allow the Treasury to buy back a larger amount of debt.

The repurchase operations come at a time when Treasury bond yields have risen since the ministry announced last August the expansion of the “debt repurchase program.” Treasury Secretary Scott Besent indicated during a recent hearing before Congress that yields might have risen to higher levels had it not been for the increase in the volume of repurchase operations.

The Treasury uses bond repurchase operations to manage the existing debt portfolio and improve the liquidity of some issues. The increase in the size of these operations comes at a time when the US Treasury market is facing large issuances and a rise in long-term borrowing costs.

US stocks fell on Wednesday, while the yield on 10-year Treasury bonds jumped to their highest level since 2007, with traders repricing interest rate expectations after data showed US corporate activity accelerating to the highest level in more than five years, amid continued inflation pressures.

The 10-year Treasury bond yield rose 8.7 basis points to 5.054 percent, hitting the highest level since 2007, while the two-year bond yield, which is more sensitive to monetary policy expectations, rose 8.49 basis points to 4.862 percent, its highest level since June 2024.

These moves came as bets rose on the Federal Reserve raising interest rates at its next meeting. Federal funds futures are currently pricing in a 73 percent probability of a rate hike in October, compared to 53 percent previously.

The Federal Reserve raised the interest rate last week by 25 basis points to a range between 3.75 and 4.00 percent, the first increase since July 2023, with inflation continuing above the central bank’s target of 2 percent.

Michael Barr, a member of the Federal Reserve Board of Governors, said on Wednesday that the bank took an important step last week to recalibrate short-term borrowing costs with the aim of reducing inflation, adding that further increases in interest rates may be necessary.

Strong economic activity

Expectations of monetary tightening were strengthened after the Standard & Poor's Global Composite Purchasing Managers' Index in the United States rose to 58.4 points in September, from 56 points in August, recording the highest reading since July 2021.

The index reflected a strong increase in new orders, along with improved industrial production and employment, indicating continued strength in economic activity despite rising borrowing costs.

Adam Patten, chief currency analyst at Investing Live, said that the continued leadership of the services sector, coupled with the sharp rise in factory production, confirms the strength of the economy at a time when the Federal Reserve is leaning toward a more stringent monetary stance.

The rise in bond yields led to increased pressure on stocks, as the Dow Jones Industrial Average fell 0.18 percent, the Standard & Poor's 500 fell by 0.53 percent, while the Nasdaq Composite fell 1.05 percent.

The wave of decline extended to global markets, as the European Stoxx 600 index fell 0.27 percent, and the MSCI global stock index fell 0.51 percent, after four consecutive sessions of gains.

Oil and geopolitics

In energy markets, oil prices rose as investors awaited the possibility of talks to end the war between the United States and Iran, coinciding with preparations for the upcoming summit between US President Donald Trump and his Chinese counterpart Xi Jinping in Washington.

West Texas Intermediate crude rose 1.49 percent to $91.87 a barrel, while Brent crude rose 2.39 percent to $101.62.

Oil prices had declined over the previous days with improved supplies from the Gulf region and growing hopes that a diplomatic solution to the conflict could be reached, but a state of caution still dominated the markets.

Cole Smid, CEO and portfolio manager at Smid Capital Management, said that the markets witnessed a series of contradictory movements regarding the chances of reaching an agreement, which makes investors hesitant to take large positions in light of the rapid change in political headlines.

Dollar and gold

Rising bond yields and rising interest rate hike expectations supported the dollar, which hit its highest levels in several weeks against the euro, the pound sterling and the Canadian dollar.

The euro fell 0.5 percent to $1.1389, its lowest level since July 29, while the dollar rose 0.56 percent against the yen to 158.25 yen, with continued caution about the possibility of Japanese authorities intervening if the US currency approaches the 160 yen level.

On the other hand, spot gold fell 1.55 percent to $4,287.05 per ounce.

The market movements come at a time when they are also anticipating the repercussions of rising energy prices on global inflation, especially in Europe, where any potential US ban on diesel exports may lead to increased pressure on prices, given the region’s dependence on US supplies of fuel.