Spot gold fell slightly during the European session on Wednesday (October 7), currently trading at $4,130 per ounce. Despite short-term pressure, the recovery in oil supply and the decline in US Treasury yields are providing some support for gold prices.

Increased oil supply and falling US Treasury yields ease pressure to raise interest rates.

Shell's CEO stated that Middle Eastern oil flows are approximately 80% of pre-conflict levels, and several major banks and shipping analysis firms have provided similar estimates. This supply recovery has eased upward pressure on energy prices, thereby reducing market concerns about inflation and Federal Reserve interest rate hikes. Meanwhile, US Treasury yields fell on Tuesday, after long-term yields rose to multi-decade highs the previous day. The decline in yields lowered the opportunity cost of holding non-interest-bearing gold, providing support for gold prices.

Risks remain: tanker attacks continue, and emergency response measures are exhausted.

Despite the supply recovery, risks remain. Tehran has intensified its attacks on oil tankers in the Strait of Hormuz in recent days, and major oil executives have warned that as the US-Iran conflict enters its eighth month, the world's contingency plans for managing the impact are running out. This warning reminds the market that the sustainability of the supply recovery remains dependent on the security situation. If the tanker attacks escalate further, oil prices could rise again, pushing up inflation expectations and creating a complex impact on gold—on the one hand, safe-haven demand could increase, and on the other hand, expectations of interest rate hikes could reignite.

Fed pricing: Less than one-fifth chance of an October rate hike

Federal Reserve officials have been downplaying the necessity of an imminent rate hike. Traders are currently pricing in less than a one-fifth chance of a rate hike at the October meeting, down from about 40% a week ago. This shift has provided support for gold, as the cooling of rate hike expectations reduces the opportunity cost of holding gold. The minutes of the Fed's September meeting, to be released on Wednesday, will provide clues to the next policy path. If the minutes are dovish, it could confirm the market's dovish repricing, providing further support for gold; if they are hawkish, it could reignite rate hike expectations, suppressing gold prices.

The Strategic Role of Gold: Considerations for Central Banks to Diversify Their Reserves

Despite gold's decline of more than a fifth since the outbreak of the US-Iran conflict in late February, central bank officials from several countries meeting in Italy this week emphasized gold's growing strategic role in diversifying reserves, as geopolitical uncertainty enhances its appeal as a safe-haven asset. This statement is noteworthy—it indicates that despite short-term downward pressure on gold prices, long-term demand from central banks remains. If geopolitical uncertainty persists, central banks' strategic allocation of gold could provide medium- to long-term support for gold prices.

Summarize

Increased Middle East oil supplies and falling bond yields have eased the urgency for a Federal Reserve rate hike this month. Shell's CEO stated that oil flows in the region are approximately 80% of pre-conflict levels, with several other institutions providing similar estimates. However, risks remain—Tehran has intensified its attacks on oil tankers in the Strait of Hormuz, and oil executives have warned that contingency plans are running out. Federal Reserve officials downplayed the necessity of a rate hike, and traders are pricing in less than a one-fifth chance of an October rate hike, down from about 40% a week ago. The minutes of the Fed's September meeting will be released on Wednesday. Despite gold falling by more than a fifth since the end of February, central bank officials from several countries have emphasized its strategic role in diversifying reserves. For gold, the recovery in oil supplies and falling yields provide short-term support, but the ongoing tanker attacks and the tone of the Fed minutes are key variables for short-term direction. A dovish tone in the minutes could lead to a further rebound in gold prices; a hawkish tone could put continued downward pressure on prices. (Spot gold daily chart, source: FX678) At 15:18 Beijing time, spot gold was trading at $4129.20 per ounce.