Gold drops over 1% as oil rally reinforces higher-for-longer rate outlook

Gold fell more than 1% on Thursday as rising oil prices stoked inflation concerns and reinforced expectations that interest rates could stay higher for longer, while investors awaited next week’s Federal Reserve meeting for clues on the policy outlook.

Spot gold slid 1.1% to $4,094.90 per ounce by 0333 GMT, hitting its lowest since October 14.

US gold futures for December delivery dropped 0.9% to $4,111.40.

If oil prices continue to rise, inflation expectations could increase, raising the likelihood of higher interest rates over the longer term and weighing on gold, said Kelvin Wong, a senior market analyst at OANDA.

Oil prices rose on Thursday as more attacks by the Houthis in Saudi Arabia prompted the US to order some diplomats and family members to leave its missions in the Kingdom.

Though stubborn inflation, largely driven by high energy prices, has bolstered the case for tighter monetary policy, Fed policymakers are expected to remain patient for now.

Traders see just a 16% chance of a rate hike at the Fed’s October 27-28 policy meeting next week, but are pricing in a 90% likelihood of an increase in December, according to CME’s FedWatch Tool.

Markets await next week’s Personal Consumption Expenditures (PCE) data, a key gauge closely watched by the central bank as it targets a 2% inflation rate.

Investors anticipate elevated interest rates at both the short and long ends of the curve, reducing gold’s appeal by increasing the opportunity cost of holding the non-yielding asset, Wong said.

Spot gold still targets the October 14 low of $4,073 per ounce, as suggested by a wedge.

Resistance is at $4,135, a break above which could lead to a gain into the $4,150-$4,169 range, according to Reuters technical analyst Wang Tao.

Among other metals, spot silver dropped 2.6% to $56.44 per ounce, platinum slid 2.1% to $1,594.25 and palladium fell 2.6% to $1,059.05.