Gold prices fall as rising oil costs fuel inflation concerns

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Gold prices fall

Highlights

Spot gold falls to $4,130 as Treasury yields rise.
High oil prices renew US inflation concerns.
Fed rate hike expectations remain a key risk.

Spot gold traded at $4,130.15 per ounce, down 0.26%, according to the latest market data. December gold futures fell 0.26%, to $4,149.17 per ounce. The declines extended weakness from the previous session, when bullion lost 0.6%, Bloomberg reports.

Rising oil prices complicate inflation outlook

Oil prices remained close to five-month highs as tensions involving Iran continued to threaten energy supplies. Tehran signaled its intention to maintain control over the Strait of Hormuz, a critical route for global oil shipments. Meanwhile, opposition among US lawmakers to a proposed diesel export arrangement with Russia added uncertainty to energy markets.

Higher energy costs can feed into consumer prices and complicate efforts to bring inflation under control. For gold, the immediate concern is that persistent inflation could require the Federal Reserve to maintain restrictive monetary policy for longer than previously expected.

US Treasury yields also remained elevated after rising in the previous session. A recovery in technology stocks reduced demand for government bonds, contributing to higher yields. That development weighed on gold because the metal does not generate interest income, making it less attractive when bond returns increase.

Federal Reserve expectations remain uncertain

Investors are closely watching the Federal Reserve ahead of its interest rate decision next week. Chair Kevin Warsh's latest remarks reinforced expectations that policymakers would leave rates unchanged at the October meeting rather than respond immediately to inflation risks.

Market pricing reflected that shift. The estimated probability of a quarter-point rate increase in October fell below 20%, compared with roughly two-thirds late last month. Nevertheless, traders continued to assign approximately a 90% probability to another increase before the end of the year.

Gold has generally remained above $4,100 during October after losing more than 6% in September. However, the metal is still approximately 20% below its level when the US-Iran conflict began in late February, reflecting the pressure from elevated yields and tighter monetary conditions.

Gold outlook depends on inflation and bond yields

The latest decline highlights the competing forces influencing precious metals. Geopolitical tensions can support demand for gold as a safe-haven asset, but rising energy prices may also strengthen expectations of tighter monetary policy.

Investors remain focused on the Federal Reserve's next policy decision as persistent inflation concerns and elevated Treasury yields weigh on gold. Although geopolitical uncertainty may support demand for the metal, the prospect of tighter monetary policy continues to limit its recovery.

We have previously highlighted that the gold market outlook brightens as China demand, and central bank buying support prices.

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