Gold fell on Tuesday after fresh escalations in the Middle East pushed oil back near $100 a barrel, a week before the Federal Reserve's next rate decision. The pullback has erased much of the metal's mid-August gains, but gold still holds a gain for the month. Central banks and major investment banks, meanwhile, continue to build gold positions.
Gold December futures opened at $4,451.60 per troy ounce on Tuesday, September 8, down 0.6% from Friday's close, after fresh escalations in the Middle East conflict drove oil prices back near $100 a barrel. The metal extended its decline during the session, trading at $4,443.90 per troy ounce as of 6:59 a.m. ET.
Oil's rally toward $100 complicates the Fed's timing
The move higher in oil is pressuring energy costs one week before the Fed is scheduled to meet and possibly adjust interest rates, starting September 15. According to ActionForex, Brent crude's rally toward $100 a barrel risks fuelling inflation and prompting the Fed to tighten monetary policy, which would create an unfavourable environment for gold. Markets will get one more read on inflation before Fed officials meet.
China keeps buying as banks call gold a hedge
Gold's supporters have not given up despite that backdrop. In August, the People's Bank of China increased its gold reserves by 650,000 ounces, marking the 22nd consecutive month of growth.
Goldman Sachs views gold as a hedge against threats to the Fed's independence, unorthodox government intervention in currency and debt markets, and escalating fiscal problems, while Amundi is raising gold's share of its portfolios, citing its affordability, liquidity and use as a risk-hedging instrument. Société Générale said the Middle East conflict is not a negative factor for gold over the long term and described the precious metals market as bullish across the board.
Gold still holds a monthly gain despite the pullback
The pullback has erased much of the gain gold made in mid-August, but the metal is still holding a 4.1% gain over the past month, up from a 1.1% increase over the past week. Over the past year, gold is up 23.8%.
Darrell Fletcher, managing director of commodities at Bannockburn Capital Markets, said gold is recovering from decades of low prices and remains a popular diversification asset for central banks and individual investors. According to Yahoo Finance: "Buying high to hope for short-term higher is a tough strategy", Fletcher said.
Sources: Yahoo Finance, ActionForex
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