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Gold prices dropped about 1% on Tuesday as investors turned cautious ahead of the Federal Reserve's highly anticipated interest rate decision, with easing oil prices reducing inflation concerns but failing to support demand for the safe-haven metal.
Spot gold declined 1.2% to settle at $4,028.64 per ounce, while gold futures also fell 1.2% to close at the same level. The retreat came as traders shifted their attention to the Federal Open Market Committee (FOMC), which began its two-day policy meeting on Tuesday.
Markets widely expect the Fed to leave interest rates unchanged, with the CME FedWatch Tool indicating roughly a 69% probability of no change. However, uncertainty remains elevated as policymakers assess inflation risks and geopolitical developments.
Investors are also closely watching comments from Fed Chair Kevin Warsh, who has consistently emphasized the central bank's commitment to restoring price stability. Since taking office, Warsh has launched a broad review of Federal Reserve operations, including task forces focused on communications and inflation policy, making his post-meeting remarks especially significant for financial markets.
Goldman Sachs described this week's Fed meeting as unusually uncertain due to recent volatility in oil prices. Meanwhile, JPMorgan analysts said softer June inflation data reduces the urgency for an immediate rate hike, although they believe the Fed's next policy move will likely be an increase. The analysts added that Warsh remains a wildcard, noting he could still gain enough support for a surprise hike if he chooses to push for stronger action against inflation.
Beyond monetary policy, easing geopolitical tensions also weighed on gold. Oil prices extended losses for a second consecutive session after President Donald Trump said the United States had held "very good talks" with Iran, raising hopes for a diplomatic resolution following months of conflict.
Trump reiterated that Iran would never be allowed to obtain a nuclear weapon while warning that U.S. military action could resume if negotiations fail. He also repeated that Iranian infrastructure, including bridges and power plants, could be targeted if Tehran refuses to reach an agreement.
With uncertainty surrounding both the Fed's policy outlook and Middle East diplomacy, traders are expected to remain cautious, leaving gold prices highly sensitive to upcoming developments.
