FxPro: Gold keeps struggling against the tide

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A stronger dollar, a rally in Treasury yields and oil’s reluctance to fall are creating headwinds for gold.
Central banks are taking advantage of gold’s dip to boost their reserves.

Gold has been unable to recover following a disappointing September, when the price fell by 6% against the backdrop of a Fed rate hike, a strengthening US dollar and a surge in long-term Treasury yields to 24-year highs. Other factors weighing on gold include oil’s stubborn refusal to fall, despite reports of a resumption of exports from the Middle East.

High energy prices suggest that inflationary pressures remain, forcing the Fed to maintain a hawkish stance, which works against gold. The resumption of attacks by Iran on tankers in the Strait of Hormuz and by Yemeni Houthis on Saudi Arabian oil infrastructure has pushed the price of Brent back above $100 per barrel, triggering another wave of sell-offs in risky assets across the markets. According to Kpler, oil flows through the Strait of Hormuz have fallen from 91% to 74% of pre-war levels.

This is all the more so as investors remain uncertain whether the Fed will tighten policy in October or postpone the move until December. CME futures put the probability of a rate rise in three weeks at 22% for October and 85% for December; however, FOMC officials are expressing conflicting views. Consequently, investors are playing it safe ahead of the publication of the minutes from the Fed’s September meeting, hoping for clarification on the central bank’s stance.

While everyone is selling, a great opportunity to buy is emerging. In September, China increased its gold reserves by a further 740,000 ounces, marking the 23rd consecutive month of accumulation. Meanwhile, according to the London Bullion Market Association (LBMA), central bank activity, coupled with mounting fiscal challenges and persistently high geopolitical risks, will drive gold prices to $5,013 per ounce within 12 months.

The LBMA noted that the energy crisis, persistent inflation, and rising bond yields to 24-year highs are creating a strong headwind for precious metals. The fact that the price of an ounce of gold has remained above $4,000 so far is evidence of strong demand for the physical asset.

The FxPro Analyst Team

Summary: A strong dollar, rising yields and costly oil weigh on gold, while central-bank buying and firm physical demand support the outlook for a recovery.
Fig. 1. The rise in oil prices since September is putting pressure on gold.
Fig. 2. Gold and the Fed’s key interest rate.

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