Gold Prices Decline Ahead of Fed Meeting Amid Rate Hike Expectations

Gold prices fell on Monday as expectations grew that the US Federal Reserve will raise interest rates this week, following hotter-than-expected inflation data and a fresh climb in oil prices.

Spot gold dropped 1.2 percent to 4,296.68 dollars an ounce, extending a third straight weekly decline from Friday, while US gold futures fell 1.7 percent to 4,335.40 dollars. The dollar strengthened to its highest level in more than a week, making gold priced in the currency costlier for buyers holding other currencies.

UBS analyst Giovanni Staunovo said markets are now fully pricing in a Fed rate hike following last week’s inflation figures, and that the renewed climb in oil prices could add to inflation concerns and keep the central bank leaning hawkish. US consumer prices picked up pace in August, with a closely watched measure of underlying inflation posting its biggest increase in four months, reinforcing expectations that the Fed will act.

Traders are now pricing in roughly an 89 percent chance of a rate hike at this week’s policy meeting, according to the CME FedWatch Tool, up sharply from about 67 percent before last week’s inflation report. Major banks including Goldman Sachs and HSBC now expect the Fed to raise rates by 25 basis points when it meets Tuesday and Wednesday. The Bank of Japan is also expected to raise rates on Friday, as energy prices climb and Middle East tensions show little sign of easing.

While gold is often viewed as a hedge against inflation, rising interest rates tend to dampen demand for the metal, since it pays no yield and becomes less attractive relative to interest-bearing assets.

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