Gold holds losses as higher oil stokes September rate hike bets

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

Bullion was trading around US$4,290 an ounce, after falling more than 1 per cent 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 per cent chance of it happening when the central bank meets in the coming days.

Higher borrowing costs are typically negative for gold, which does not 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 Treasury yield briefly touched 5 per cent for the first time in nearly three years on Monday on concerns over inflation and swelling government and corporate borrowing needs, which is another headwind for non-yielding bullion. 

The precious metal is down more than 3 per cent in September, after trading above US$4,600 an ounce in late August, as traders repeatedly recalibrate the outlook for Fed policy.

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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 0.3 per cent to US$4,288.18 an ounce at 7.48 am in Singapore. Silver was down 0.2 per cent at US$63.11 an ounce, after declining 2 per cent the day before.

Platinum and palladium edged lower. The Bloomberg Dollar Spot Index, a gauge of the US currency, was stable after rising 0.4 per cent the previous session. BLOOMBERG