Gold prices fell ahead of a highly anticipated decision on US interest rates later this week, which could spark widespread debate, while a temporary lull in Middle East tensions helped to ease inflation fears.
The precious metal fell by as much as 0.8% to near $4,040 an ounce, erasing a modest gain in the previous session.
Traders are now positioning themselves for a potentially controversial interest rate decision from the Federal Reserve on Wednesday, as policymakers are divided between June's weaker-than-expected inflation reading and the latest surge in oil prices that has accompanied renewed fighting between the United States and Iran.
Interest rate swaps indicate a roughly 40% probability of a quarter-point increase on Wednesday, an unusually high degree of uncertainty so close to the Federal Reserve's decision, by the standards of recent years.
Citadel Securities said it expects interest rates to rise this week, a move it says will bolster Federal Reserve Chairman Kevin Warsh's credibility in the fight against inflation.
Christopher Wong, strategist at Overseas-Chinese Banking Corp., said: Even if the Federal Reserve keeps interest rates unchanged, a hawkish message or a clear indication that further tightening is still under consideration could support real yields and the US dollar, temporarily limiting gold's recovery.
Gold has fallen by about a quarter since the start of the war five months ago, as high energy prices have fueled inflationary pressures. However, the metal has remained near the key support level of $4,000 an ounce since late June, supported by a wave of buying on dips. Gold-backed exchange-traded funds have added to their holdings for five consecutive days, their longest winning streak since May.
The pause in strikes is supporting gold amid anticipation of the interest rate decision.
Recent developments in the Middle East have provided further support. President Donald Trump said on Monday that the United States and Iran had resumed talks to end the five-month-long war, after both sides halted strikes in recent days. The US president said there was a good chance something could be done regarding an agreement, adding that a return to fighting was likely if the negotiations failed.
However, expectations of rising interest rates are keeping gold under pressure, according to analysts at Shenzhen-based Zhishui Investment Management. They wrote in a note: “The upward price movements in recent days lack momentum and show some hesitation.”
Spot gold fell 0.7% to $4,047.22 an ounce at 10:25 a.m. in Singapore. Silver dropped 1.7% to $57.39 an ounce. Platinum and palladium also traded lower, while the Bloomberg Dollar Index, a measure of the U.S. currency, edged slightly higher.
