High oil prices combined with strengthening US economic activity have further reinforced market expectations that the Federal Reserve will keep interest rates elevated or even continue raising them. Gold prices extended their decline on Monday, with the precious metals market coming under pressure.

As of publication, Brent crude oil broke above $100 per barrel, rising more than 2.5% on the day. Spot gold fell below $4,150 per ounce, while spot silver dropped 5.01% to $61.08 per ounce. Current market pricing suggests roughly a 65% to 70% probability of another Fed rate hike in October, with silver, platinum, and other precious metals weakening in tandem.

The US dollar index edged up 0.1% to 0.2%, hovering around 101, further pressuring dollar-denominated gold. According to a report, analysts at Saxo Bank noted that some of the gold selling occurred during Asian trading hours and may be related to investors locking in profits ahead of a long holiday.

Elevated oil prices and rising rate hike expectations

Sustained high oil prices have become an important external factor weighing on gold prices.

After Trump rejected Iran's proposal to reopen the Strait of Hormuz for seven days, Iranian Foreign Minister Araghchi said Iran is fully prepared for a resumption of hostilities, but the door to diplomacy remains open, and whether contacts resume depends on America's choice. According to a media report citing Iranian media on the 27th, Araghchi stated that Iran is "fully prepared for a resumption of hostilities" and is "also ready at any time for diplomatic engagement."

The Middle East conflict has now entered its eighth month, with Brent crude up about 70% year-to-date. Persistently high energy prices have intensified inflationary pressure and prompted the market to reassess the Fed's rate path.

After the Fed raised its benchmark rate by 25 basis points in mid-September, several officials signaled further rate hikes. Cleveland Fed President Beth Hammack said stronger economic growth expectations, concerns about government debt, and expectations of further rate increases are together driving long-term US Treasury yields higher. ANZ also pointed out that high oil prices combined with strengthening US industrial activity have further reinforced market expectations that the Fed will maintain a tightening stance for longer.

Treasury yields climb, gold remains far from record high

The bond market is also weighing on gold. The spread between 10-year and 2-year US Treasury yields briefly narrowed last week to 17 basis points, the lowest level since early 2025. A persistently flattening yield curve means the opportunity cost of holding non-yielding gold has risen further.

Since the start of this month, gold prices have mainly fluctuated between $4,230 and $4,510, and remain significantly below the record high of nearly $5,600 set in January. ANZ believes that higher yields and a stronger dollar leave gold facing a still-tight macroeconomic environment.

However, physical demand continues to provide some support. ANZ data shows that gold ETF demand remains steady, with related ETF holdings increasing by about 50 tonnes since the start of this month.

Two data releases this week will test rate hike expectations

On the policy front, US Treasury Secretary Scott Bessent called on the Fed to keep an open mind on the rate path and argued that productivity gains from artificial intelligence and deregulation will help curb inflation, a view that differs from current market expectations for further rate hikes.

Meanwhile, US consumer confidence fell to a four-month low in September, with consumers' concerns about prices and the economic outlook intensifying.

The market will next focus on the August PCE inflation data due on Wednesday and the September nonfarm payrolls report due on Friday. Both data releases will provide important reference for the Fed's October meeting and will also serve as key catalysts for gold's short-term direction.