Spot gold was down about 2.7% at $4,171.85 by 06:27 GMT, while U.S. gold futures fell 2.7% to $4,204.30. The decline pushed bullion to its weakest level since early August.
The move is a sharp reversal from just over a week ago, when gold reached a one-week high as falling oil prices temporarily eased inflation concerns.
Oil Has Turned Back Into A Problem For Gold
The unusual part of the current selloff is that higher oil prices are hurting an asset traditionally viewed as protection against inflation.
The mechanism runs through interest rates.
Expensive energy can push transportation, manufacturing and consumer costs higher. If that keeps inflation elevated, the Fed has more reason to raise rates again. Higher interest rates generally increase Treasury yields and the opportunity cost of holding gold, which produces no income.
Markets were pricing roughly a 66% probability of another Fed rate increase in October early Monday, after the central bank already raised its target range to 3.75%-4.00% earlier this month.
That relationship has repeatedly driven bullion this year. Gold previously struggled when Brent moved above $90, as investors weighed whether expensive energy would prolong the Fed's tightening cycle.
Higher Yields Are Overpowering Safe-Haven Demand
The decline is notable because geopolitical uncertainty would normally support bullion.
Instead, the combination of high bond yields, expensive energy and a firm dollar is currently proving stronger than safe-haven demand.
| Market Signal | Pressure On Gold |
|---|---|
| Oil prices rising | Higher inflation risk |
| Fed hike odds rising | Higher opportunity cost |
| Treasury yields elevated | Makes bonds more competitive |
| Stronger dollar | Makes gold more expensive internationally |
A similar conflict appeared earlier this month when hot U.S. inflation pushed both gold and Bitcoin lower despite record institutional demand for bullion.
