Gold pares back gains as oil prices trim losses

Gold prices pared gains on Friday as oil prices erased some earlier losses, while investors kept tabs on the outlook for global interest rates. 

At 09:47 ET (13:47 GMT), spot gold had inched up 0.4% to $4,356.83 an ounce, while gold futures had fallen 0.1% to $4,394.67 an ounce.

Spot gold is up about 0.9% over the past one-week period. The metal recovered more than 2% on Thursday after touching a near six-week low on Wednesday.

Benchmark Brent crude futures erased some initial losses after Bloomberg News reported that state-backed oil company Saudi Aramco informed at least two oil refining customers in Europe that they will receive no crude oil next month following an attack on the kingdom’s main east-west pipeline to the Red Sea. 

The report comes amid fighting between Saudi Arabia and Yemen’s Iran-backed Houthis, which has sparked fears around oil supplies. Critically, gains by the Houthis in western Yemen have given the group increased leverage over the Bab el-Mandeb Strait, which, along with the Strait of Hormuz, is relied upon by Saudi Arabia to ship oil out to global markets.

The Bab el-Mandeb links the Red Sea with the Gulf of Aden, while Hormuz is located off Iran’s southern coast.

Hopes remain that Saudi Arabia could soon partially restore flows through its key east-west pipeline, which was damaged in drone attacks last week. The pipeline normally transports crude to Yanbu on Saudi Arabia’s Red Sea coast. According to Bloomberg News, Saudi Arabia is seeking to restore about half of the pipeline’s capacity within days, compared to earlier reports that it could take weeks to come back online.

Traders have been worried that energy-driven inflationary pressures will fuel a monetary policy tightening cycle around the world. Higher interest rates can weigh on non-yielding assets like gold.

Mirroring recent moves by the Federal Reserve and the European Central Bank, the Bank of Japan became the latest central bank to raise interest rates on Friday, noting concerns that inflation was coming increasingly close to crossing its 2% annual target. Whether policymakers will roll out more rate increases in the coming months remains a key source of debate among investors.

Meanwhile, analysts at ING flagged "upside risks" to the U.S. dollar after a hawkish message from the Fed gave "the green light to markets to fully price in a hike in October if data and energy prices suggest so." A firmer greenback can dent gold by making it more expensive for overseas buyers.

The U.S. dollar index, which tracks the currency against a basket of global peers, was last higher by 0.3% at 100.51.