Gold prices extended last Friday's decline on Monday, yet the $4,400 level witnessed intense back-and-forth tug-of-war between bulls and bears. Robust U.S. employment data immediately reinforced market bets on a Federal Reserve rate hike this month, pushing bond yields higher and weighing on gold, a non-yielding asset. Simultaneously, escalating Middle East conflicts have driven up oil prices and inflation concerns, ironically further solidifying rate hike expectations. Gold found supportive buying twice near the $4,400 mark, staying just above the key 100-day moving average support at $4,346. The People's Bank of China's 22nd consecutive month of gold purchases provides confidence to bullish investors, but last week's rejection at the 200-day moving average of $4,535 continues to make them cautious. Bulls and bears are fiercely contesting this range. Investors are currently digesting the short-term shock from employment data while awaiting this week's crucial inflation figures. They are also closely monitoring how shipping and energy dynamics in the Gulf region might inversely impact the interest rate outlook through the inflation channel. Gold's short-term direction remains largely dictated by rate expectations, while oil price rises stemming from Middle East tensions currently serve more to reinforce the case for rate hikes and pressure gold prices. Early Tuesday, spot gold traded slightly higher, hovering around $4,420 per ounce, up roughly 0.3%.

Stronger-than-expected jobs data casts a shadow over the gold market

Last Friday's stronger-than-expected U.S. August non-farm payroll report acted as the immediate trigger for Monday's gold price decline. The economy added 162,000 jobs, significantly exceeding market predictions, while the unemployment rate held steady at 4.1%. This data powerfully demonstrated resilience in the U.S. labor market, swiftly altering market assessments of the Fed's policy trajectory. According to the CME FedWatch tool, trader probability of a 25-basis-point rate hike at the Fed's September 15-16 meeting jumped to around 60% from roughly 50% before the data release, with some institutions forecasting a median probability near 58% to 60%. Ole Hansen, Head of Commodity Strategy at Saxo Bank, noted that gold and silver price movements are starkly contrasted with energy prices. Following the strong jobs report which boosted bond yields and reinforced September rate hike expectations, precious metals prices extended their decline. Spot gold settled 0.56% lower on Monday at $4,406.23 per ounce, while December-dated U.S. gold futures fell 0.5% to settle at $4,456.40. Although trading volumes were relatively light due to a U.S. holiday, this did not obscure the fact that prices found significant buying support below $4,400 on two occasions. Hansen emphasized that the current gold price remains substantial above the important support near $4,320, while sustained selling pressure exists above $4,500. This pattern of "support below, resistance above" suggests the market hasn't turned uniformly bearish. Instead, while digesting rate hike expectations, capital is still finding opportunities to buy on dips at key levels. UBS's change in stance is particularly representative. The bank previously anticipated no policy adjustments throughout 2026 but quickly revised its forecast following the jobs data, now predicting 25-basis-point rate hikes in both September and December. In a report, UBS Wealth Management stated that hawkish policy signals—especially from Fed Chair Warsh's speech at Jackson Hole—coupled with inflation risks from supply bottlenecks and robust August employment figures, were sufficient to alter their previous assessment. Institutions like Citigroup and Macquarie have also raised their rate expectations based on the latest jobs numbers. Higher interest rates increase the opportunity cost of holding gold, naturally pressuring the non-yielding asset. Although gold is traditionally viewed as an inflation hedge, its appeal tends to be periodically diminished in environments with rising real interest rates. This week, markets will also see the release of the Producer Price Index (PPI) and Consumer Price Index (CPI) reports. The PPI scheduled for Thursday and the CPI due the following day will further determine the final path for the Fed's September meeting. If inflation data continues to run high, rate hike expectations could strengthen further, keeping short-term pressure on gold prices. Conversely, should the data show signs of easing, gold could regain some breathing room. Fed Governor Waller has already stated that if data confirms inflation pressures are abating, he leans towards advocating for holding rates steady. Therefore, this week's data releases represent a critical dividing line for the short-term direction of gold prices.

Middle East conflict lifts oil prices, amplifying inflation worries and rate hike expectations over safe-haven demand

While rate expectations dominate sentiment in the gold market, escalating tensions in the Middle East are channeling through oil prices and inflation, further reinforcing rather than weakening the rate hike narrative, thus creating net downward pressure on gold. Over the weekend, mutual attacks between the U.S. and Iran targeting shipping interests pushed oil prices to nearly six-week highs, rekindling market concerns about inflation. Mohammad Bagher Qalibaf, Speaker of the Iranian Parliament, issued a clear warning that attacks on Iranian assets would be met with retaliation, highlighting that energy infrastructure across the Gulf, including American oil and gas interests, remains vulnerable. Senior Iranian security official Mohsen Rezaei stated that Tehran would soon announce the establishment of a new restricted zone in the Persian Gulf and unveil new shipping routes through the Strait of Hormuz. Any vessel entering these areas would be placed on Iran's sanctions list. Iran committed to keeping the Strait of Hormuz open only if the U.S. ceases its sabotage, threats, and attacks against the country. The Strait of Hormuz serves as a critical artery for global oil and gas supplies; pre-conflict estimates indicated roughly one-fifth of the world's petroleum and LNG shipments passed through it. Shipping data reveals that an average of only 10 commercial vessels per day traversed the strait over the past ten days, the lowest level since May. U.S. military forces struck three Iranian oil tankers on Saturday, one of which was located near Iran's primary oil export hub, Kharg Island. This followed previous attacks by Iran's Revolutionary Guard on U.S. warships conducting missions. The conflict has also impacted Gulf oil producers like the UAE, whose tankers have been attacked in the Strait of Hormuz. The UAE has initiated alternative routes for its energy exports and trade to avoid these activities being "held hostage" by the war. Concurrently, Israeli airstrikes in southern Lebanon killed at least 12 people, further escalating regional tensions. Despite a ceasefire agreement between Israel and Hezbollah reached in June, this attack raises market concerns that military operations might resume. Tehran maintains that any lasting agreement with Washington must include an end to Israeli attacks on Lebanon. Rising energy costs directly elevate inflation expectations, creating a mutually reinforcing rather than offsetting dynamic with the Fed's rate hike path. Higher oil prices imply greater inflation stickiness, thereby supporting market bets on the Fed maintaining or accelerating its tightening cycle, pushing real interest rates higher and increasing the opportunity cost of holding gold. While gold traditionally holds safe-haven appeal during geopolitical turmoil, in the current environment, inflation concerns driven by higher oil prices and elevated rate hike expectations have overshadowed pure safe-haven buying, becoming the dominant force pressuring prices. Last Friday, Trump even suggested that unless the Fed cuts rates as he demands, the U.S. would cease trade relations with countries having trade surpluses with America. This kind of political pressure adds an element of uncertainty to the monetary policy outlook but finds it difficult to offset the supportive effect of oil prices and inflation on rate expectations. The market, therefore, tends to view the Middle East conflict as a catalyst reinforcing the hawkish narrative rather than a pure safe-haven event boosting gold prices.

China's central bank extends gold buying streak to 22 months, underpinning long-term demand fundamentals

While Western markets focus on rates and geopolitics, official gold purchases in the East are providing another layer of solid support for gold. China's central bank reported Monday that gold reserves stood at 76.73 million fine troy ounces at the end of August, an increase of 650,000 ounces from the previous month, marking the 22nd consecutive month of additions. The U.S. dollar value of gold reserves rose by $43.726 billion month-on-month to $350.080 billion. During the same period, China's foreign exchange reserves totaled $3,438.325 billion, an increase of $19.549 billion month-on-month. The sustained official gold buying serves both as a hedge against dollar asset risk and as a strategic choice to optimize reserve structure amid rising global uncertainty. The 22-month consecutive buying streak demonstrates that the People's Bank of China's allocation to gold is not a short-term operation but reflects a clear long-term intention. This steady, sovereign-level demand often acts as a floor during price corrections and makes it challenging for markets to ignore the influence of Eastern players when assessing gold's medium-to-long-term prospects. Unlike Western investors who cyclically reduce gold holdings based on rate expectations, official purchases are driven more by strategic and diversification considerations, offering greater persistence and more resilient support for prices.

Intertwining forces leave gold at a critical observation point

In summary, the gold market currently resides in a sensitive phase where multiple forces are intertwined. Strong employment data has reinforced Fed rate hike expectations, pushing up real interest rates and placing direct downward pressure on gold. Escalating Middle East conflicts have pushed up oil prices and inflation worries, paradoxically reinforcing the rate hike logic, with its dampening effect on gold outweighing traditional safe-haven demand. China's central bank continues its purchases, solidifying the long-term demand story. The robust buying interest displayed around the $4,400 level indicates the market is not overwhelmingly bearish, while resistance above $4,500 serves as a reminder that upside potential requires cooperation from data and events to materialize. The upcoming PPI and CPI releases this week will act as significant short-term catalysts. Should inflation data come in hot, rate hike expectations may intensify, maintaining downward correction pressure on gold prices in the near term. If the data shows signs of moderation, gold could regain momentum to test upper resistance. Concurrently, any substantive developments regarding shipping restrictions in the Strait of Hormuz, or further exchanges of fire between Iran and the U.S., could continue to strengthen rather than weaken rate expectations through the oil and inflation channels, indirectly weighing on gold. Investors should also monitor statements from Fed officials and whether political pressure from the Trump administration on monetary policy triggers new market volatility. As of 07:38 Beijing time, spot gold was trading at $4,419.63 per ounce.