Gold prices moved higher on Wednesday, briefly trading above $4,440 an ounce as a softer US dollar supported demand for the precious metal.
Investors were also closely monitoring the outlook for US interest rates as renewed violence in the Middle East increased uncertainty across global markets.
Gold Prices Rise as Dollar Stays Weak
By 10:18 ET, spot gold was up around 1.4% at $4,416.92 an ounce.
Gold futures also advanced, rising approximately 0.5% to $4,461.90 an ounce.
The US Dollar Index, which tracks the greenback against a basket of major global currencies, was little changed near 98.77.
Some analysts pointed to recent strength in the Japanese yen as one of the main factors limiting the dollar’s upside.
A weaker dollar can support gold prices because it makes the metal cheaper for buyers using other currencies.
Middle East Violence Supports Safe-Haven Demand
Geopolitical concerns also remained a major factor in the gold market.
Iran and the United States reportedly exchanged another round of attacks across parts of the Middle East, reducing hopes for a quick resolution to the conflict.
The prolonged tensions have already affected global financial markets and increased concerns about energy supplies.
Brent crude oil futures moved back above $100 per barrel, highlighting fears over possible disruptions through the Strait of Hormuz.
The waterway, located off Iran’s southern coast, is one of the world’s most important routes for global energy shipments.
Higher Oil Prices Raise Inflation Concerns
The renewed increase in crude oil prices is adding to concerns about inflation.
Higher energy costs could make it more difficult for central banks to bring inflation under control, especially ahead of several important interest rate decisions.
Markets are now pricing in roughly a 60% probability that the Federal Reserve will raise interest rates by 25 basis points next Wednesday.
That compares with an estimated probability of around 40% one week earlier.
Recent comments from policymakers have suggested that inflation remains a key priority.
At the same time, signs of continued strength in the US labor market may give the Federal Reserve more room to increase borrowing costs.
Why Higher Interest Rates Matter for Gold
Higher interest rates are generally considered a negative factor for gold.
Gold does not generate interest or income, meaning higher yields on bonds and other assets can increase the opportunity cost of holding the precious metal.
As a result, stronger expectations for additional Federal Reserve rate hikes could limit gold’s upside.
Rick Kanda, Managing Director at The Gold Bullion Company, said gold has recently faced greater pressure as expectations surrounding US monetary policy have shifted.
Gold Recorded a Strong August Rally
Despite recent volatility, gold delivered a strong performance in August.
The metal gained nearly 10% during the month, marking its best monthly increase since January.
However, such a rapid advance may also encourage some investors to take profits.
Kanda noted that when gold prices rise sharply, investors may decide to lock in gains, particularly if stronger economic data increases the likelihood of further interest rate hikes.
Could Gold Retest $4,685?
Gold could still attempt to return toward its late-August high near $4,685 an ounce.
However, the path may remain highly volatile.
Kanda warned that investors should expect significant price fluctuations as markets continue to react to interest rate expectations, economic data and geopolitical developments.
On the downside, gold could potentially retreat toward the low-$4,000 range if expectations for higher US interest rates continue to strengthen.
Gold Outlook Remains Tied to Rates and Geopolitics
The short-term outlook for gold remains influenced by several competing forces.
A weaker dollar and geopolitical uncertainty are supporting demand for the metal, while rising interest rate expectations could create additional pressure.
Investors will therefore be closely watching the next Federal Reserve decision, inflation developments and any escalation in the Middle East for clues about gold’s next major move.
