Gold declines as traders weigh prospects for interest-rate hike

Gold declined ahead of a potentially divisive decision on US interest rates later this week, while a fragile pause in Middle East hostilities soothed inflation fears.

Bullion fell as much as 1 percent to trade near $4,040 an ounce, erasing a modest gain in the previous session.

Traders are positioning themselves for the Federal Reserve’s rate decision Wednesday, with policymakers torn between June’s tamer-than-expected inflation reading and the more recent rise in oil prices that accompanied a flare-up in fighting between the US and Iran.

Interest-rate swaps imply about a one-in-three chance of a quarter-point increase, an unusually high degree of uncertainty so close to a Fed decision by the standards of recent years.

Citadel Securities said it expects a hike this week, a move it argues would strengthen Fed Chairman Kevin Warsh’s credibility in the battle with inflation.

“Even if the Fed leaves rates unchanged, a hawkish message or a clear signal that further tightening remains under consideration could lend support to real yields and the US dollar, temporarily capping gold’s recovery,” said Christopher Wong, a strategist with Oversea-Chinese Banking Corp.

Gold is down by nearly a quarter since the US-Iran war began five months ago, with high energy prices stoking inflationary pressures.

However, the metal has held near the key support level of $4,000 an ounce since late June, bolstered by a wave of dip-buying. Bullion-backed exchange-traded funds added holdings for five straight days — the longest streak of gains since May.

The most recent developments in the Middle East have added further support. President Donald Trump said Monday that the US and Iran were once again in talks to end the five-month war, with both sides having paused strikes in recent days.

The US leader said there’s “a good chance that something could happen” regarding a deal, while adding that a return to fighting is likely if negotiations fail.

The expectation of higher rates is keeping gold under pressure, however, according to analysts from Shenzhen-based Zhishui Investment Management.

“Upward price action in recent days lacks momentum and is showing some hesitation,” they wrote in a note.

Spot gold slipped 0.8 percent to $4,045.23 an ounce at 10:01 a.m. in London. Silver fell 1.3 percent to $57.58 an ounce.

Platinum and palladium also traded lower. The Bloomberg Dollar Spot Index, a gauge of the US currency, was steady. (Bloomberg)