Gold Prices Rise as Markets Watch Developments in the Middle East
Gold prices rose in Asian trading on Friday, approaching $4,400 per ounce, supported by falling oil prices and a weaker dollar, as traders continued to monitor developments in the Middle East and global monetary policy expectations.
Spot gold rose by more than 1% to reach $4,399 per ounce, while U.S. gold futures also rose today.
Although gold is typically viewed as a hedge against inflation, high interest rates may weaken demand for the precious metal by increasing the appeal of yield-bearing assets.
Oil prices fell for the third consecutive day, while the dollar remained weak after retreating from recent highs; a weak dollar makes dollar-denominated commodities less expensive for holders of other currencies.
The Federal Reserve Shifts the Macroeconomic Landscape
The fundamental picture has become particularly interesting, as the Federal Reserve has taken a course contrary to what many gold optimists had anticipated earlier this month. The Fed raised the federal funds rate by 25 basis points to a range of 3.75%–4.00% —the first such increase in three years—while the latest projections indicated that a majority of policymakers see the possibility of at least one additional hike before the end of 2026.
Such developments typically create a challenging environment for gold; rising interest rates increase the opportunity cost of holding a non-yielding asset, while rising Treasury yields and a strong dollar add further pressure.
These pressures were clearly evident earlier this week, as gold fell sharply amid rising Treasury yields toward the 5% level and growing market expectations of further monetary tightening by the Federal Reserve.
However, market movements rarely follow a straight line; after the initial reaction, Treasury yields retreated and the dollar weakened, helping gold to recover.
The significance of this reaction lies in the fact that it shows gold trading is currently influenced not only by the Federal Reserve’s decision itself, but also by how bond yields and the value of the dollar evolve, and expectations regarding the next move in monetary policy.
Oil Quietly Becomes a Driver of the Gold Price
Oil is another key factor in this equation, as the price of Brent crude has remained above $100, amid the continued impact of Middle East supply risks on energy markets, Oil prices fell today to around $103 per barrel, as concerns about supply disruptions eased and hopes grew that alternative supply routes would help alleviate some of the immediate pressure.
Rising oil prices could fuel inflation expectations, which might force central banks to maintain tighter monetary policies for a longer period.
This is the tension we are seeing now: Geopolitical risks may support demand for gold as a safe haven, but the inflationary repercussions of the energy shock may simultaneously reinforce the need for a tighter monetary policy.
Gold finds itself caught between these two factors.
Why Is Gold Rising Despite Central Banks Raising Interest Rates?
1. The Bank of Japan’s interest rate hike was widely anticipated
The Bank of Japan raised its key interest rate today from 1% to 1.25%.
The decision was approved by a vote of 7 to 2, marking Japan’s highest interest rate since 1995.
As for gold, the impact of the Bank of Japan’s rate hike is not necessarily direct or straightforward.
The rise in Japanese interest rates may affect global bond markets, currency flows, and investor positions; however, the immediate impact depends on how well the decision aligns with market expectations.
If traders have already factored in the possibility of a rate hike (i.e., priced it in), the announcement itself may have less of an impact than the forward guidance provided by the Bank of Japan.
2. The Federal Reserve’s hawkish policy remains a major risk for gold
On September 16, the Federal Reserve raised its benchmark interest rate by 25 basis points to a range of 3.75%–4.00%.
The decision was accompanied by a signal that further monetary tightening measures are likely; 16 out of 18 Federal Reserve policymakers expected at least one additional interest rate hike by the end of 2026, which creates a challenging environment for gold.
When interest rates and Treasury yields rise, investors may have less incentive to hold a non-yielding asset (such as gold).
Furthermore, a strong U.S. dollar can increase pressure on dollar-denominated commodities. However, gold managed to rebound following the Federal Reserve’s decision.
The explanation lies in the fact that markets do not respond solely to the interest rate decision itself; gold prices were influenced by the following:
- Was the decision already priced in?
- Changes in U.S. Treasury yields
- Movements in the U.S. dollar
- Inflation expectations
- Geopolitical uncertainty
3- Falling Oil Prices May Support Gold
Oil prices have recently fallen from their previous highs as concerns about supply disruptions have eased.
Reports that Saudi Arabia may ship additional crude oil through Oman have helped alleviate concerns about immediate supply.
Reuters reported that oil prices continued to fall as the market reassessed the likelihood of disruptions in the Middle East.
This is relevant to gold because oil prices influence inflation expectations. However, this relationship is not automatic.
Geopolitical tensions may support gold prices through demand for gold as a safe haven, even if they simultaneously lead to higher oil prices.
For gold traders, the interplay between oil prices, inflation expectations, U.S. Treasury yields, and the U.S. dollar is a critical factor.
