Gold prices edged higher on Tuesday as markets scaled back expectations for a Federal Reserve interest-rate increase this month, offering some relief to bullion even as a firm U.S. dollar and elevated Treasury yields continued to limit demand.
Spot gold rose 0.3% to $4,152.04 an ounce by 0909 GMT, while U.S. gold futures for December delivery gained 0.56% to $4,180.
The move left gold close to a key technical and psychological level around $4,100, which traders are watching as the metal attempts to stabilize after coming under pressure from rising real yields and a stronger dollar.
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“Gold trades near key support just above $4,100, with macroeconomic headwinds from rising real yields and dollar strength continuing to weigh on investor appetite,” said Ole Hansen, head of commodity strategy at Saxo Bank.
The competing forces in the gold market have become increasingly pronounced. Expectations for near-term monetary tightening have weakened after softer U.S. employment data, reducing one of the biggest immediate threats to bullion. At the same time, Treasury yields remain historically high, increasing the opportunity cost of holding an asset that does not generate interest.
Markets have sharply reduced expectations for a Federal Reserve rate increase in October following weaker-than-expected job growth in September and downward revisions to payrolls figures for the previous two months.
Traders now see only about a 21% probability of a rate increase at the October meeting, according to CME’s FedWatch Tool. Expectations for December remain firmer, with markets pricing in an almost 70% probability of an increase.
A separate reading showed traders assigning a 78% probability that the Fed will leave rates unchanged at its next meeting.
The divergence in expectations points to the uncertainty surrounding the central bank’s next move. A weaker labor market could reduce pressure on policymakers to tighten monetary policy, while persistent inflationary pressure could argue for keeping rates elevated for longer.
The immediate direction of interest rates matters because higher yields increase the return available from interest-bearing assets relative to bullion. When investors can earn more from government debt, the incentive to hold gold generally declines unless concerns about inflation, currencies or financial stability provide a counterweight.
The market will therefore focus closely on minutes from the Federal Open Market Committee’s September meeting, due Wednesday. Investors are expected to examine the discussion for clues about how policymakers view the labor market, inflation and the balance between the risks of keeping rates too high and easing policy too quickly.
The minutes matter because recent economic data have sent mixed signals. Employment growth has softened, but services-sector price pressures remain elevated.
Treasury Yields Keep Pressure on Bullion
The bond market has become a major source of headwinds for gold. The benchmark 10-year Treasury yield was down about 3 basis points to 5.281% on Tuesday after reaching its highest level since April 2002 on Monday. The 30-year yield fell just under 3 basis points to 5.637%, after also reaching a level not seen since May 2002.
The two-year Treasury yield was down less than 2 basis points to 4.816%. The retreat on Tuesday followed a sharp rise in yields the previous session, when investors absorbed data showing continued strength in parts of the U.S. services economy and persistent price pressure.
The Institute for Supply Management’s services purchasing managers’ index rose to 54.9 in September, matching expectations but easing slightly from August. More significant for inflation-sensitive markets, the prices index increased 1.4 points to 74.
The combination of resilient economic activity and elevated service-sector prices complicates the case for rapid monetary easing. Even if employment is weakening, policymakers could remain concerned that inflation is not falling quickly enough.
That tension is reflected in Treasury markets, where yields have remained near multi-decade highs.
Higher real yields are important for gold because they increase the relative cost of holding bullion. Gold does not pay interest, so investors compare its expected return with what they can earn from government securities after adjusting for inflation.
The fact that gold has remained above $4,100 despite those conditions suggests that other forces are providing some support.
Dollar Strength and Fiscal Concerns Complicate The Outlook
The U.S. dollar also remained near Monday’s stronger levels on Tuesday, creating another headwind for bullion. Because gold is priced in dollars, a stronger greenback makes the metal more expensive for buyers using other currencies. That can reduce demand even when the underlying investment case for gold remains intact.
Ole Hansen said investors are likely to remain focused on the dollar and Treasury yields in the absence of a heavy U.S. economic data calendar.
“With limited US economic data due this week, market focus will likely remain on the dollar, yields and ongoing political and fiscal turmoil in the euro zone,” Hansen said.
Fiscal concerns have become an important part of the market backdrop. Investors remain concerned about rising government debt and widening budget deficits across parts of the euro zone, particularly France.
Higher deficits can push governments toward increased borrowing, potentially putting upward pressure on sovereign bond yields. They can also raise broader questions about debt sustainability and fiscal policy, providing a potential longer-term source of demand for gold as a store of value. That has created an unusual environment for bullion. Higher yields and a strong dollar are negative for gold in the short term, while concerns about government debt, inflation and political instability can provide longer-term support.
The competing forces have made interest-rate expectations particularly important for determining which side dominates.
Oil Retreat Eases Inflation Pressure
Oil prices provided another important signal for financial markets on Tuesday, falling as resilient Middle Eastern crude exports and the release of emergency stockpiles by G7 countries eased concerns about an immediate supply shortage.
Brent crude fell about 2% to $98.05 a barrel, while West Texas Intermediate futures declined 2.3% to $87.47.
The decline in oil prices could provide some relief to central banks because energy costs feed directly into headline inflation and can influence transportation, manufacturing and household expenses. It is expected to provide a reprieve for the Fed because a sustained oil shock could make it more difficult to lower interest rates even if economic growth and employment weaken.
Geopolitical developments also remained in focus. Saudi-backed Yemeni government forces said they had made a rapid advance to retake coastal territory around the Bab el-Mandeb Strait, reaching as far as Mocha and pushing Iran-backed Houthi forces out of much of the territory they had seized the previous month.
The Bab el-Mandeb is a critical shipping route linking the Red Sea with the Gulf of Aden, meaning developments there can influence energy markets and global shipping costs. Any sustained disruption could put upward pressure on oil and inflation expectations, although Tuesday’s decline in crude prices suggested markets were placing greater weight on current supply availability.
Gold Faces A Test From The Bond Market
Gold’s immediate outlook seems to depend on whether the forces supporting bullion can overcome the pressure created by high real yields and a strong dollar.
For now, the market appears to be finding some support from reduced expectations of an October Fed hike. But that support could weaken if inflation remains sticky, Treasury yields continue climbing, or investors begin to price a greater probability of a December increase.
The opposite scenario could strengthen gold. A further deterioration in the U.S. labor market could reduce expectations for additional tightening, while persistent fiscal concerns in the U.S. and Europe could increase demand for assets viewed as stores of value.
The Federal Reserve minutes will be the clearest near-term catalyst. Investors will be looking for evidence of how strongly officials are responding to weaker employment data and whether inflation remains the dominant concern.
Gold’s ability to hold above $4,100 is consequently becoming an important test of the metal’s underlying demand. The rally is facing unusually strong competition from government bonds offering yields above 5%, but concerns over fiscal sustainability, monetary policy and geopolitical risk are preventing those yields from completely displacing gold’s appeal.
Other precious metals were mixed on Tuesday. Silver was little changed at $61.10 an ounce, platinum fell 0.6% to $1,710.71, and palladium declined 1% to $1,160.66.
However, the immediate battle for gold remains between monetary policy and macroeconomic uncertainty. A lower probability of an October rate hike has provided breathing room, but unless Treasury yields retreat more decisively, the metal may struggle to regain momentum above recent highs.