Gold hovers near $4,000 after steep drop, all eyes on Fed and Middle East risk

Gold prices held just below $4,000 per ounce on Monday, as markets weighed the prospect of another US interest rate increase while monitoring growing tensions in the Middle East.

Volatility driven by Fed expectations and Middle East conflict

Spot gold traded close to $3,995 in the early Asian session, recovering slightly after dropping more than 4% last week—its sharpest weekly decline since June. Prices briefly hit $3,975.23 on Friday.

Rather than triggering sustained safe-haven inflows, the deepening crisis involving Iran has pushed energy prices higher and reignited inflation concerns.

The Federal Reserve’s interest rate decision on Wednesday will be the next key event for traders, with many watching if a decline below last week’s low could open the way to $3,900.

Brent crude closed at $116.72 on Friday after fresh attacks on Saudi energy infrastructure intensified supply worries. It edged lower to around $114.88 on Monday amid renewed diplomatic efforts but remained elevated following a 6.2% weekly rise.

Analysts assessed that higher energy costs make it harder for price pressures to fade across the US economy. This situation constrains the Fed’s ability to lower rates and increases the possibility of tighter policy.

Konstantinos Chrysikos of Kudo noted that risks to Middle Eastern energy assets are reinforcing expectations for further interest rate hikes.

As bond yields move higher, income-generating assets become increasingly attractive to investors compared to gold, which does not pay interest or dividends.

Mini dictionary: Kudo is a financial research and analysis firm that provides market commentary on commodities and global macroeconomic developments.

Stock market turbulence amplifies gold selling

Beyond monetary policy, weakness in equity markets also fueled selling pressure on gold.

Last week saw significant declines in leading artificial intelligence-related stocks, leading some investors to liquidate gold holdings to meet losses elsewhere.

Industry participants highlighted that selling gold to cover margin calls is fundamentally different from exiting because of changes in its long-term investment case. Nonetheless, such forced sales can accelerate downward momentum if prices test critical support zones.

Rich Checkan, president of Asset Strategies International, commented that falling equity markets prompted investors to raise cash by selling gold in response to liquidity demands.

He anticipated that bargain hunters might re-enter if the Federal Reserve’s Wednesday announcement avoids a negative surprise for markets.

Mini dictionary: Asset Strategies International is a US-based precious metals and alternative assets investment advisory firm.

Outlook: Key support and resistance levels

The $3,975 mark from Friday’s session has now emerged as the first level to watch. A sustained break below this point could prompt further selling, while a rebound above $4,000 would indicate the down move has not taken hold.

Praveen Singh, head of commodities at Mirae Asset Sharekhan, warned that a decisive break of $4,000 could shift the focus to $3,930 as the next reference level for traders.

He flagged the $3,900 region as an important area to watch, though he did not set it as an explicit price target.

The Fed is widely expected to keep rates unchanged at its meeting on 28 October. Market focus will be on the Fed’s response to the oil shock and any hints regarding a December rate increase, for which probability was estimated at roughly 75% on Monday.

September’s US Personal Consumption Expenditures inflation report, due Thursday, will provide additional signals on whether inflationary pressures are easing.

A stronger policy stance from the Fed or higher-than-expected inflation data could lead to further losses in gold. Conversely, any softer tone from officials or renewed buying interest could support a move back toward $4,065–$4,075.