Gold weakens amid pressure from growing Fed rate hike bets

 Gold prices dropped on Tuesday, slipping below $4,300 an ounce, as surging oil prices fueled inflation concerns ahead of the Federal Reserve’s much-anticipated monetary policy decision this week. 

At 09:28 ET (13:28 GMT), spot gold had fallen by 0.3% to $4,287.81 an ounce, while gold futures declined 0.6% to $4,327.70 an ounce.

The yellow metal sank to a five-week low on Monday, as ongoing tensions in the Middle East sparked a fresh climb in oil prices to around four-month peaks. Worries have abounded that elevated energy costs could drive up inflation, persuading central banks -- including the Fed -- to hike interest rates in response. 

Markets are now pricing about a 92% probability of a rate increase at the conclusion of the Fed’s gathering on Wednesday, according to CME FedWatch, up from 59% a week earlier.

Against this backdrop, benchmark U.S. 10-year Treasury yields have surged above 5% and touched their highest level in nearly two decades. At the same time, the U.S. dollar has firmed. Higher borrowing costs tend to weigh on gold because bullion does not pay interest, while a stronger dollar can dent the metal’s attractiveness to overseas buyers.

Saudi pipeline closure fuels oil price jump

Oil prices have moved higher after Saudi Arabia shut its east-west pipeline following attacks by Iran-backed Houthi militants in Yemen. The disruption puts millions of barrels a day at risk. The pipeline has been a key route for Saudi oil flows following the effective closure of the Strait of Hormuz earlier this year. 

Citing two regional officials, The Associated Press said the 1,200-kilometer long pipeline will be offline for between three to five weeks while the damage, including at a crucial pumping station, is repaired. The AP added that the pipeline may be in partial use during the repairs, but it was not certain how much oil would be flowing.

Since late August, an average of 2.6 million to 4 million barrels per day of oil were getting through the pipeline. Traders have suggested that a prolonged shutdown of the pipeline could disrupt as much as 4% of global oil supply, Reuters reported.

"Markets are entering a week where oil, central banks and yields could all pull in the same direction: higher inflation and tighter financial conditions. The real question is whether policymakers validate or challenge those expectations, with the answer likely to determine the next major move across currencies, equities and gold,” said Lukman Otunuga, Head of Market Research at FXTM.