$4,100: Gold drops below threshold as Middle East energy shock bolsters hawkish Fed outlook

$4,100 gives way as Gold falls. Expectations of higher-for-longer interest rates curb demand.
A December Fed rate increase is expected by markets, following an anticipated pause next week.
Demand for government bonds accompanies a further retreat in the US Dollar and Treasury yields from recent peaks.

XAU/USD trades around $4,078 at the time of writing. Gold is down 1.50% on Thursday, falling below $4,100 even as the US Dollar (USD) weakens and US Treasury yields decline. Buyers remain scarce as Middle East tensions fuel concerns over energy-driven inflation, strengthening expectations that interest rates will stay high for longer.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Plans for renewed strikes against Iran after the US midterm elections have been drawn up by the United States (US) and Israel, The New York Times reported. Iran's energy infrastructure could be among the targets.

Fresh attacks on Saudi Arabia's Shaybah oil field and King Fahd International Airport have been reported as tensions between Saudi Arabia and the Houthis intensify. Non-emergency government employees and their family members have also been ordered to leave Saudi Arabia by the US State Department.

West Texas Intermediate (WTI) crude is recovering towards $100, gaining 1.40% on the day and trading close to five-week highs. Oil prices have risen as the latest geopolitical developments deepen concerns about further disruption to Middle East energy supplies.

Across major economies, the persistent energy shock has lifted inflation above central bank targets, leading policymakers to increase borrowing costs. Although Gold traditionally serves as a safe-haven asset and an inflation hedge, higher interest rates diminish the attraction of holding a metal that pays no yield. A more prolonged conflict may require central banks to maintain restrictive monetary policy for longer.

Next week's Federal Reserve (Fed) meeting is now in focus. Following September's increase of 25 basis points (bps), the US central bank is widely expected to keep interest rates on hold. Traders will scrutinise signals on the Fed's rate trajectory as markets price in a further increase in December. The CME FedWatch Tool puts the probability of that hike at 89%.

For now, however, the US Dollar and Treasury yields are drawing little support from these hawkish expectations. Both are retreating from recent highs as worries about AI-related investments pressure equities and encourage demand for government bonds.

After touching a three-week low of 101.45, the US Dollar Index (DXY) is trading around 101.66. The index measures the Greenback's value against a basket of six major currencies. Meanwhile, the benchmark 10-year US Treasury yield is around 5.06%, a daily decline of 1%.

Further weakness in the US Dollar and Treasury yields could limit Gold's losses. Nevertheless, the metal is likely to remain responsive to shifts in interest rate expectations and Oil prices.

Gold: Key Questions

What attracts investors to Gold?

Widely used as both a store of value and a medium of exchange, Gold has held an important place throughout human history. Today, its appeal extends beyond its lustre and use in jewellery. The metal is widely regarded as a safe-haven asset, making it a favoured investment during periods of turbulence. Because it does not depend on a particular issuer or government, Gold is also commonly viewed as a hedge against inflation and currency depreciation.

Which buyers hold the most Gold?

Central banks hold more Gold than any other group. To support their currencies during unsettled periods, they typically diversify reserves and purchase Gold, reinforcing perceptions of economic and currency strength. Substantial Gold reserves can bolster confidence in a country's solvency. In 2022, central banks increased their reserves by 1,136 tonnes of Gold, valued at around $70 billion, according to the World Gold Council. No larger annual purchase has been recorded since records began. Emerging-market central banks, including those in China, India and Turkey, are rapidly expanding their Gold reserves.

How does Gold move relative to other assets?

The US Dollar and US Treasuries, both leading reserve and safe-haven assets, have an inverse correlation with Gold. A weaker Dollar typically accompanies a rise in Gold, allowing investors and central banks to diversify their holdings during turbulent periods. Gold also tends to move in the opposite direction to risk assets. Stock market gains generally weigh on the metal, whereas selling in riskier markets usually supports it.

Which factors drive Gold prices?

Many different forces influence Gold prices. Its safe-haven appeal means geopolitical instability or concerns about a severe recession can trigger rapid gains. Lower interest rates generally support the non-yielding metal, while higher borrowing costs tend to weigh on it. Most price movements, however, depend on the performance of the US Dollar (USD), since Gold is quoted in dollars (XAU/USD). Dollar strength typically restrains Gold prices; a weaker Dollar is more likely to lift them.