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Gold drops 1% after oil rally, as Fed rates are in focus

Gold drops 1% after oil rally, as Fed rates are in focus
Gold drops 1% after oil rally, as Fed rates are in focus

The price of gold fell?on Friday, as an intensifying conflict in the Middle East drove up oil and fueled investor fears that inflationary pressures might push the U.S. Federal Reserve into raising interest rates this year.

Spot gold fell 1.2% at 1215 GMT to $4,079.50 an ounce, after reaching its highest level in over a month on Wednesday, $4,165.87 per ounce. U.S. Gold Futures for August Delivery fell 1.7% to $4.082.80.

Nikos Tzabouras is a senior market analyst at Jefferies owned Tradu.com.

Tzabouras said that the geopolitical escalation and higher oil prices, as well as the outlook for higher rates, leave gold vulnerable to further declines towards $3,900 over the next few days.

Even if policymakers keep?rates the same (at the Fed meeting next week), as expected, the conflict continues to fuel inflation risk, which supports expectations for monetary tightening.

According to the CME FedWatch Tool, traders are now pricing in an 80% chance that a Fed rate hike will occur in September. This is up from 68% Wednesday.

Houthis, who are Iran-aligned, said that they had struck two Saudi oil tanks as part of an Iranian naval blockade against Saudi Arabia. This could create a second choke point on the global oil supply. The U.S. military has completed its 12th night of attacks against Iran, prompting further retaliation.

Prices of oil rose for the fifth consecutive day.

The increased oil prices caused by the Gulf supply disruptions are affecting gold prices, as they have raised expectations for higher interest rates in the future. This tends to reduce the appeal of gold that doesn't yield.

The European Central Bank will almost certainly keep its interest rates unchanged on Thursday, but it will leave the door open for a rate increase in September.

(Reporting by Sukanya Mitra and Swati Verma in Bengaluru; Editing by Harikrishnan Nair) (Reporting by Sukanya Mitra and Swati Verma in Bengaluru; Editing by Harikrishnan Nair)

(source: Reuters)