Spot gold tumbled 4% on Monday to close at $4,114.93 per ounce, having earlier touched $4,110.80, its lowest level since August 5. US futures gold also fell 3.5% to settle at $4,168.40. It was a "perfect storm" driven by oil prices, inflation expectations, Fed rate hike bets, a stronger dollar and surging US Treasury yields. As a traditional safe-haven asset, gold briefly lost its shine under a multitude of pressures, and market sentiment quickly turned cautious. In early Asian trading on Tuesday, spot gold hovered near its lows, trading around $4,122.5 an ounce.
The trigger for this sharp drop in gold prices came first from the crude oil market. US President Donald Trump rejected a peace proposal put forward by Iran, which had been aimed at resolving the conflict between the two sides and reopening the Strait of Hormuz. After the news emerged, oil prices surged by more than $4 a barrel at one point, with Brent crude futures eventually settling 96 cents, or 0.9%, higher at $105.28 a barrel, while US crude futures rose 19 cents, or 0.2%, to settle at $92.60 a barrel. Although Qatari mediators subsequently promised to hold separate talks with the United States and Iran, helping to narrow oil's gains, market concerns about supply disruptions did not truly dissipate. The reason rising oil prices dealt such a heavy blow to gold is that they directly ignited inflation worries. Jim Wyckoff, a market analyst at American Gold Exchange, noted that a sharp rise in crude prices means price inflation could become more troublesome, which in turn implies the Fed will adopt a more restrictive monetary policy. Gold is usually seen as an inflation hedge, but under the current market logic, rising inflation actually strengthens central bank rate hike expectations, pushing up real rates and the dollar, which puts enormous pressure on non-yielding gold. In other words, what oil's rally brought was not safe-haven buying in gold, but fear of a more hawkish Fed.
The Middle East situation itself remains full of uncertainty. Iran insisted over the weekend that only diplomacy can resolve its conflict with the United States and Israel, and Trump said on Sunday that he expects US negotiators to hold more talks this week. Preliminary Kpler data showed that as Saudi Arabia and the UAE increased exports, crude exports from major Middle Eastern producers rebounded to 12.8 million barrels per day in September, the highest since the war broke out in February. But UBS analyst Giovanni Staunovo cautioned that although more vessels are passing through the Strait of Hormuz, oil flows remain below pre-conflict levels and market supply is still insufficient. Diesel prices have also risen sharply because of the Middle East war, the Russia-Ukraine conflict and export bans by Russia and major Asian countries, and the White House is even considering relaxing regulations to expand sales of red diesel and discussing a possible ban on diesel exports. These factors are all reinforcing inflation expectations and have also temporarily allowed the rate logic to suppress gold's safe-haven appeal.
If oil prices were the trigger, then the dollar and US Treasury yields were the two mountains that crushed gold prices. The dollar rose 0.15% against major currencies on Monday, with the dollar index climbing to 101.18, holding near a roughly two-month high. A stronger dollar makes dollar-denominated gold more expensive for overseas buyers, directly undermining global demand for gold. At the same time, US Treasury yields extended their advance, further raising the opportunity cost of holding non-interest-bearing gold. The 10-year Treasury yield rose 4.88 basis points to 5.23%, with an intraday high of 5.2741%, the highest since mid-June 2007. The 30-year yield rose 5.36 basis points to 5.5556%, touching 5.5829% at one point, the highest since mid-May 2004. The two-year yield, which typically moves in line with Fed rate expectations, rose 4.99 basis points to 4.914%, with an intraday high of 4.9555%, the highest since May 2024. The closely watched spread between two-year and 10-year yields also fluctuated, briefly narrowing to 28.50 basis points before steepening to positive 31.4 basis points. Marc Chandler, chief market strategist at Bannockburn Forex, said the situation now is that the United States rejected Iran's proposal, oil prices jumped in response, and that put upward pressure on US Treasury yields, which is exactly what has driven broad dollar strength. Lawrence Gillum, chief fixed income strategist at LPL Financial, also pointed out that as long as uncertainty over the Iran conflict persists, bond yields may continue to face upward pressure, higher oil prices will show up in future inflation data, and the market has already priced in a Fed rate hike cycle over the next 12 months. For gold, a stronger dollar and elevated Treasury yields together form a "perfect storm," and Jim Wyckoff said outright that rising US Treasury yields, combined with the dollar at multi-week highs, have pushed metals prices sharply lower.
The deeper backdrop to gold's slump is a sharp shift in market expectations for Fed monetary policy. The Fed raised its benchmark rate by 25 basis points earlier this month and signaled possible further hikes in the coming months. Several policymakers echoed the Fed's hawkish stance, warning that inflation risks remain too high and rates may need to rise further. Cleveland Fed President Hammack was among the latest officials to reiterate that view. On Monday, Fed Governor Cook also said she expects continued inflation pressure in the coming months from AI-related demand and higher oil prices, although she did not explicitly say further rate hikes were needed. The data in interest rate markets is even more striking. The CME FedWatch tool showed traders see about a 94% chance of one Fed rate hike in December. In bond market trading, expectations for a 25 basis point Fed hike in October rose to about 70% from 64% last Friday, and the probability briefly reached 73% during the session. Traders have almost fully priced in four quarter-point rate hikes over the next 12 months. That means the market is pricing a far more aggressive tightening cycle than before. For gold, rising rate hike expectations are fatal. Gold generates no interest, and when US Treasury yields rise and the dollar strengthens, the relative appeal of holding gold falls sharply. More importantly, higher oil prices may feed into inflation, forcing central banks to keep rates higher for longer. The market is now turning its attention to job openings, the ADP employment report, the personal consumption expenditures price index and the nonfarm payrolls report, all due this week. If these data are consistent with expectations for further monetary tightening, gold will remain under pressure in the near term.
Although the Middle East conflict continues and oil and gas transportation through the Strait of Hormuz is still hindered, gold has not received obvious safe-haven support from it. This shows that the dominant logic in the current market is not risk aversion, but inflation and tightening. Qatari mediators are expected to hold separate meetings in New York on Monday or Tuesday with Iranian Foreign Minister Araghchi and the US side, with talks expected to focus on a revised version of a seven-day proposal Iran put forward during the UN General Assembly last week. Renewed hopes for negotiations caused crude futures to give back some gains and also offered some relief to investors worried about persistently high inflation and Fed rate hikes. However, geopolitical risks have not truly been removed. Supply disruptions related to the Middle East war and the Ukraine war are still affecting energy markets, diesel prices have risen sharply, and Washington is discussing a possible diesel export ban, pushing Brent crude's premium to US crude futures to its highest since May, indicating that the market expects US refiners may cut crude processing if diesel cannot be exported. These factors could all push inflation higher again in the future and make the Fed's tightening stance even firmer. For gold, geopolitical risk is a double-edged sword: on one hand it may bring safe-haven buying, but on the other it strengthens rate hike expectations through higher oil prices and instead suppresses gold prices. The current market has clearly chosen the latter.
Looking ahead, gold's short-term direction will depend heavily on a series of economic data releases due this week. Wednesday's personal consumption expenditures price index and Friday's nonfarm payrolls report are especially critical, and both are expected to be consistent with expectations for further monetary tightening. If the data are strong, especially if inflation comes in above expectations, market bets on a Fed hike in October or even December will rise further, the dollar and US Treasury yields may continue to climb, and gold could test lower levels. Conversely, if the data show signs of cooling, or if Middle East talks make substantive progress and push oil prices lower, gold may get a chance to breathe. It is worth noting that although traders are betting there may be as many as four more rate hikes over the next year, Gillum said he expects inflation to slow next year and that some market pricing is too aggressive. That means the current plunge in gold may already include an overreaction to tightening expectations. Once the market finds that the Fed may not be as aggressive as feared, or that the oil price rise is only a short-term shock, gold's corrective rebound could be just as rapid. But until then, gold will remain under the heavy pressure of high rates, and any rebound may be limited by dollar strength and elevated US Treasury yields.
Overall, gold's slide to a seven-week low is the result of rising oil prices, inflation worries, Fed rate hike bets, a stronger dollar and surging US Treasury yields acting together. This "perfect storm" has temporarily disabled gold's safe-haven appeal, and the main thread of market trading has shifted from "geopolitical risk" to "tightening expectations." In the short term, gold will still take its cues from inflation data and the Fed, with PCE, nonfarm payrolls and the progress of Middle East talks serving as the key variables that determine whether gold prices can stop falling. As of 07:14 Beijing time, spot gold was quoted at $4,123.52 an ounce.
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