Gold prices were little changed on Tuesday after recovering from their biggest weekly drop since June, as a stronger U.S. dollar and high Treasury yields offset support from fading expectations of a Fed rate hike.
As of 03:44 (Moscow time), XAU/USD was down 0.1% at $4,138.09 per ounce, while gold futures rose 0.2% to $4,165.15. XAG/USD was down 0.1% at $60.998, and XPT/USD fell 0.2% to $1,721.37. The U.S. Dollar Index was little changed at 102.17.
A stronger dollar and rising yields weigh on gold
Gold’s recovery comes as investors assess mounting fiscal pressures around the world and their implications for monetary policy.
In Europe, political uncertainty and France’s budget problems supported demand for the dollar. Political paralysis triggered a sell-off in the most vulnerable European government bonds and pushed the euro to a 17-month low, driving the dollar to its highest levels of the year.
A stronger dollar typically puts pressure on gold, making the metal more expensive for buyers using other currencies.
Concerns about French debt also added to the broad rise in global bond yields. Banque de France Governor Emmanuel Moulin warned that France could face increasingly tight constraints due to high interest costs if it fails to improve its public finances, as French bond yields continued to rise.
U.S. Treasuries also came under pressure on Monday, with long-term yields reaching fresh multi-decade highs as the bond market continued its months-long decline. Rising yields increase the opportunity cost of holding gold, which pays no interest.
A report from the U.S. Institute for Supply Management (ISM) showed that price pressures in the services sector rose at their fastest pace in more than four years last month. Persistent price pressures keep the door open to further Fed policy tightening, despite a weakening labor market.
Interest rate swaps indicated about a 23% chance of a Fed rate hike in October, while markets continued to price in a full quarter-point increase by the December meeting.
Weak jobs data reduce bets on a rate hike
Gold fell more than 6% in September as concerns about energy-driven inflation, expectations of higher U.S. interest rates, and a stronger dollar weighed on the metal.
However, expectations of an imminent Fed rate hike fell sharply after weaker-than-expected U.S. jobs data were released last week. Fed officials have also been actively pushing back against expectations of a near-term rate hike.
This shift lent some support to gold, even as rising bond yields remained a headwind.
Minutes from the Fed’s September meeting, at which the central bank raised interest rates for the first time in three years, will be released midweek and may offer further clues about the monetary policy outlook.
ANZ analysts noted that gold rebounded after last week’s sharp drop as investors reassessed mounting fiscal pressures around the world.
They also pointed to lower rate hike expectations following weak employment data: markets now put the chance of a rate hike in October at around 20%, compared with about 70% a week ago.