Key Highlights

  • Gold traded around $4,300 an ounce on Tuesday, near five-week lows.
  • Elevated oil prices strengthened expectations for a Fed rate hike this week.
  • Markets are pricing in roughly a 92% chance of a 25 basis point hike on Wednesday.
  • The US 10-year Treasury Yield climbed toward 5%, adding further pressure on non-yielding bullion.

Gold traded around $4,300 an ounce on Tuesday, hovering near five-week lows as elevated oil prices strengthened expectations for a US Federal Reserve Interest Rate hike this week.

What Happened

Oil prices extended their gains as Saudi Arabia's East-West pipeline remained shut, while Ukraine disputed President Trump's claim that it had already reached an agreement with Russia to halt attacks on energy infrastructure. Rising energy prices fueled Inflation concerns and increased pressure on the Fed to tighten policy, with markets currently pricing in roughly a 92% chance of a 25 basis point rate hike on Wednesday.

The dispute over the Russia-Ukraine energy truce adds a further layer of uncertainty to the near-term inflation outlook, since a genuine resolution would likely ease some of the oil-driven price pressure currently weighing on gold.

Market Reaction

The US 10-year Treasury yield also climbed toward 5% amid inflation and fiscal concerns, adding further pressure on non-yielding bullion. Elsewhere, the Bank of Japan is also expected to raise rates on Friday, as elevated energy costs and ongoing tensions in the Middle East continue to complicate the inflation outlook.

Rising yields globally, not just in the US, are compounding the headwind for gold, since higher rates in any major economy increase the Opportunity cost of holding an asset that pays no yield.

Outlook

Wednesday's Fed decision, along with the Bank of Japan's rate decision on Friday, represent the next major catalysts for gold prices, given the direct pressure higher rates place on non-yielding assets.

Any resolution to the disputed Russia-Ukraine energy truce, or further clarity on the Saudi pipeline repair timeline, could also shift the oil-driven component of the current pressure on gold.