Gold Drops Under $4,300 as Saudi Oil Crisis Fuels Fed Rate Hike Expectations to 92%

TLDR

• Gold declined 0.6% to $4,271 per ounce, reaching its lowest point in five weeks
• Crude oil surged following Saudi Arabia’s closure of its east-west pipeline after attacks by Houthi militants
• Federal Reserve rate hike probability now stands at 92% for Wednesday’s policy meeting, jumping from 59% seven days earlier
• U.S. 10-year Treasury yields surged past 5%, marking nearly two-decade highs
• Rising interest rates and dollar strength create headwinds for gold, a non-yielding asset

Gold prices experienced a significant decline on Tuesday, sliding beneath the $4,300 per ounce threshold as escalating crude oil values intensified inflation concerns in advance of a crucial Federal Reserve policy announcement.

Spot gold decreased 0.6% to settle at $4,271.32 per ounce. Meanwhile, gold futures contracts declined 1.0% to $4,310.90 per ounce during morning trading sessions.

The precious metal reached a five-week bottom on Monday. Tuesday’s trading session extended the downward trajectory as energy market developments intensified selling pressure.

Pipeline Attack Amplifies Inflation Concerns

Saudi Arabia closed its strategic east-west pipeline following attacks by Iran-backed Houthi militants operating from Yemen. The 1,200-kilometer infrastructure is projected to remain out of service for three to five weeks during repair operations, particularly at a critical pumping facility.

This pipeline had been transporting between 2.6 million and 4 million barrels daily since late August. Market analysts indicate an extended closure could eliminate approximately 4% of worldwide oil supply.

Brent crude surged 2% to reach $107.70 per barrel in response to the disruption. This development follows the earlier effective closure of the Strait of Hormuz this year, elevating the pipeline’s importance as an essential export route for Saudi petroleum.

As energy expenses climb, market participants fear inflation may persist at elevated levels or accelerate further. This scenario intensifies expectations that the Federal Reserve must take action.

Rate Hike Expectations Reach Near Certainty

Financial markets currently assign a 92% probability to a rate increase at Wednesday’s Federal Reserve gathering. This represents a dramatic increase from the 59% likelihood calculated just seven days prior, based on CME FedWatch tracking data.

U.S. 10-year Treasury bond yields have broken through the 5% barrier, representing their most elevated position in approximately two decades. Simultaneously, the U.S. dollar index has gained strength.

These twin developments create adverse conditions for gold. As a non-interest-bearing asset, gold becomes less attractive relative to yield-generating investments when rates climb. Additionally, dollar strength increases gold’s cost for international buyers utilizing alternative currencies.

Lukman Otunuga, Head of Market Research at FXTM, observed that markets are entering a critical period where oil dynamics, central bank policies, and bond yields may align directionally. He emphasized that the pivotal factor will be whether policymakers validate or challenge current market expectations, with their response likely determining the next significant movements across currencies, equities, and precious metals.

ANZ analysts similarly highlighted that constrained oil availability is strengthening rate hike anticipations, contributing additional downward force on gold values.

Gold futures were last quoted at $4,331.20 per troy ounce during European morning trading hours, registering a 0.5% daily decline.

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