Gold falls below $4,100 as hawkish Fed outlook gains support from Middle East energy shock

• Expectations of persistently high interest rates curb demand, sending Gold below $4,100.
• A Fed pause next week is priced in by markets, followed by a further rate increase in December.
• Demand for government bonds helps extend the retreat in the US Dollar and Treasury yields from recent peaks.

With interest rates expected to stay higher for longer as Middle East tensions fuel energy-related inflation concerns, Gold (XAU/USD) falls below $4,100 on Thursday. The precious metal is finding little buying interest even as the US Dollar (USD) weakens and US Treasury yields decline. XAU/USD is trading at around $4,078 at the time of writing, a daily loss of 1.50%.

Plans for fresh strikes on Iran after the US midterm elections have been drawn up by the United States (US) and Israel, The New York Times reported. The country's energy infrastructure could be among the targets.

Relations between Saudi Arabia and the Houthis are also deteriorating, with reports of further attacks on Saudi Arabia's Shaybah oil field and King Fahd International Airport. In addition, the US State Department has instructed non-emergency government employees and their family members to depart Saudi Arabia.

Oil prices have risen as the latest geopolitical developments heighten fears of additional disruption to Middle East energy supplies. Trading close to five-week highs, West Texas Intermediate (WTI) crude is recovering towards $100, gaining 1.40% on the day.

Across major economies, inflation has been driven above central bank targets by the continuing energy shock, leading policymakers to increase borrowing costs. Despite Gold's established role as a safe haven and a hedge against inflation, higher rates diminish the attraction of an asset that offers no yield. A more protracted conflict may therefore require central banks to maintain restrictive monetary policy for longer.

Attention now turns to next week's Federal Reserve (Fed) meeting. Having increased interest rates by 25 basis points (bps) in September, the US central bank is widely expected to keep them on hold. Traders will scrutinise any guidance on the Fed's rate outlook, with markets pricing in a further increase in December. The CME FedWatch Tool puts the probability of that move at 89%.

For now, however, the US Dollar and Treasury yields are drawing little support from these hawkish expectations. Both are retreating from recent highs as worries about AI-related investments put pressure on equities and encourage demand for government bonds.

After touching a three-week low of 101.45, the US Dollar Index (DXY) is trading at around 101.66. The index measures the Greenback's value against a basket of six major currencies. Meanwhile, the benchmark 10-year US Treasury yield is around 5.06%, a daily decline of 1%.

Interest rate expectations and changes in Oil prices are likely to remain key influences on Gold. Further weakness in the US Dollar and Treasury yields could, however, limit its losses.