Gold entered the week under clear pressure as expectations of a US interest rate hike returned to the forefront following stronger than expected inflation data. The metal is trading near $4,340 per ounce after posting a weekly loss of 1.8%, its third consecutive weekly decline, while spot gold stood near $4,336. At the same time, the US Dollar Index rose to 99.19, adding another layer of pressure on gold as investors approach the Federal Reserve decision with a high degree of caution.
Core inflation rose 0.3% month on month in August, pushing market expectations for a September rate increase to around 88%. This suggests that a large portion of the expected Federal Reserve move has already been priced into the market. Gold, however, remains highly sensitive to the tone of the central bank and any guidance regarding the path of interest rates over the coming months. Higher borrowing costs increase the appeal of bonds and other yield generating assets, reducing the relative attractiveness of gold as long as demand for protection against broader risks does not increase significantly.
Interest rates are not the only factor shaping the outlook. The sharp rise in oil prices is bringing inflationary pressure back through higher energy costs, leaving the Federal Reserve with a more complicated policy challenge. Brent crude returned to around $107 per barrel following strong gains last week. With supply disruptions in the Middle East continuing, inflation could remain above levels preferred by major central banks. This development creates two opposing forces for gold. Higher inflation may support tighter monetary policy, which weighs on the metal, while the geopolitical nature of the current energy shock can also increase demand for defensive assets such as gold.
For this reason, ANZ continues to maintain a positive longer term outlook for the precious metal despite expectations of additional monetary tightening. The bank expects three interest rate increases of 25 basis points each through March 2027. At the same time, it believes that tensions in the Middle East and elevated energy prices will keep demand for gold intact as a hedge against uncertainty. ANZ continues to target $5,400 per ounce over the next 12 months, reflecting its view that geopolitical risk and investment demand could eventually outweigh the negative impact of higher interest rates.
Gold is also receiving support from improving investment demand. Holdings in gold exchange traded funds and speculative positions have recovered in recent months, while institutional demand in China remains strong alongside greater investor participation in India. These flows are important because they suggest that the latest decline does not represent a broad exit from gold. Instead, investors appear to be repositioning ahead of an important monetary policy decision.
The oil market is currently being driven by a very different set of forces, with supply risk becoming the dominant factor in pricing. Brent crude jumped to $108.41 per barrel, while West Texas Intermediate climbed to $102.84. The move followed fresh Houthi attacks on Saudi targets, renewed tensions around the Strait of Hormuz and growing risks to shipping through the Bab el Mandeb Strait.
The importance of the latest developments extends beyond the scale of the attacks themselves. Saudi Arabia now has fewer alternatives available for redirecting its oil exports. Some shipments that could previously have been moved away from the Strait of Hormuz are now facing increased risks through the Bab el Mandeb route as well. The closure of the East West pipeline adds another challenge to the flexibility of the Saudi export network. As a result, the geopolitical risk premium rises quickly whenever threats expand across several major energy routes at the same time.
The postponement of talks between Iran and Gulf countries has also removed some of the optimism that emerged in the market last week. Investors had hoped that diplomatic progress could increase vessel traffic through the Strait of Hormuz and ease pressure on regional oil supplies. The delay has brought the risk of continued disruption back into focus. With flows through the strait already reduced to a fraction of levels seen before the confrontation, oil prices have become increasingly sensitive to any news involving shipping, energy infrastructure or military activity.
The relationship between gold and oil has become increasingly important in the current environment. A sustained move in oil above $100 per barrel raises inflation expectations and gives the Federal Reserve a stronger case for maintaining a restrictive monetary policy stance, which is negative for gold in the short term. However, if higher energy prices develop into a broader economic shock or geopolitical tensions intensify further, investor behavior could quickly shift in favor of gold as a defensive asset. The next major move in the metal will therefore depend on the balance between the path of US interest rates and the scale of geopolitical and energy market risks.
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