Gold Extends Decline to $4,135 an Ounce as Oil Rally Fuels Inflation Fears

Gold extended its decline as rising oil prices stoked inflation concerns and kept alive the prospect of further U.S. interest-rate increases.

According to Bloomberg, spot gold fell 0.1% from the previous session to $4,134.91 an ounce as of 7:47 a.m. Singapore time on October 20. Bullion had also dropped 0.6% a day earlier.

Inflation pressures have resurfaced as global oil prices neared their highest level in five months. Uncertainty in energy markets increased after Iran said it may have no choice but to assert control over the Strait of Hormuz, while the U.S. Congress objected to President Donald Trump's agreement related to exports of Russian diesel.

Markets are focused on the direction of Federal Reserve policy. Fed Chair Kevin Warsh signaled support for keeping rates unchanged ahead of next week's Federal Open Market Committee meeting. As a result, the probability of a 0.25 percentage-point rate increase this month has fallen to below 20% from about 67% at the end of last month.

Even so, the possibility of another rate increase later this year remains high. Markets see about a 90% chance that the Fed will raise its benchmark rate once more by year-end. Because gold does not pay interest, higher rates can undermine its appeal to investors.

After falling more than 6% last month, gold has mostly held above $4,100 an ounce this month. It has maintained that level despite a stronger dollar and elevated Treasury yields, but it remains down about 20% since the U.S.-Iran conflict began in late February.

Other precious metals also weakened. Spot silver fell 0.3% to $56.93 an ounce, while platinum and palladium edged lower. The Bloomberg Dollar Spot Index was little changed after rising 0.1% in the previous session.