Gold trades near $4 300 as higher oil stokes rate-hike bets

Gold held a decline as increasing disruptions to oil flows from the Middle East reinforced expectations the Federal Reserve will raise interest rates as soon as this week.

Bullion fell as much as 0.4% to trade below $4 290 an ounce, after dropping more than 1% in the previous session to a five-week low. The prospects of higher energy prices stoking inflation have piled pressure on the Fed to make its first rate increase in three years, with traders pricing in a 92% chance of it happening when the central bank meets in the coming days. Higher borrowing costs are typically negative for gold, which doesn’t pay interest.

Oil rose, after Saudi Arabia closed its East-West pipeline due to attacks last week. The halt puts at risk millions of barrels a day that were moving through it to circumvent the turmoil in the Strait of Hormuz, at a time when markets are clamouring for supply. The kingdom has yet to say how long the disruption will last and how quickly it can increase Hormuz shipments to offset the shutdown.

The 10-year US Treasury yield rose to the highest level in almost two decades on concerns over inflation and swelling government and corporate borrowing needs, which is another headwind for non-yielding bullion.

Gold is likely to face headwinds leading up to and immediately after the Fed meeting, said Gerald Gan, the chief investment officer at Reed Capital Partners Pte. Bullion is likely to be weighed down by higher yields and “increasingly hawkish market expectations that Kevin Warsh may initiate a rate-hiking cycle, at least a brief one, to quell rising price pressures,” he added.

The precious metal is down more than 3% in September, after trading above $4,700 an ounce in late August, as traders repeatedly recalibrate the outlook for Fed policy. Despite the near-term headwinds, many investors are still betting that bullion will grind higher as it rediscovers its traditional value as a portfolio hedge.

Spot gold fell 0.2% at $4 291.82 an ounce at 2:45 p.m. in Singapore. Silver was down 0.1% at $63.16 an ounce, after declining 2% the day before. Platinum and palladium edged higher. The Bloomberg Dollar Spot Index, a gauge of the US currency, was up 0.2% after rising 0.4% the previous session.