As of 06:27 Greenwich Mean Time, spot gold fell by about 2.7% to $4,171.85; US gold futures also fell by 2.7% to $4,204.30. This decline has pushed gold prices back to their lowest level since early August.

This trend represents a sharp reversal from just over a week ago. At that time, gold prices rose to a one-week high, as the decline in oil prices temporarily alleviated concerns about inflation.

Oil prices once again become a source of pressure on gold

What is unusual about the current sell-off is that rising oil prices are harming an asset that has traditionally been seen as a hedge against inflation.

Its transmission mechanism operates through interest rates.

Rising energy prices will push up transportation, manufacturing, and consumption costs. If this keeps inflation at a high level, the Federal Reserve will have even more reason to raise interest rates again. Higher interest rates typically lead to higher yields on U.S. Treasury bonds and increase the opportunity cost of holding interest-free gold.

Earlier on Monday, markets anticipated that the probability of the Federal Reserve raising interest rates again in October was around 66%. Previously, the Fed had raised its target interest rate range to 3.75%-4.00% earlier this month.

This association has driven fluctuations in gold prices several times this year. Previously, when Brent crude oil broke above $90 per barrel, gold came under pressure as investors feared that high energy prices would prolong the Federal Reserve's tightening cycle.

Yields rising outweighs the demand for hedging

What makes this round of decline noteworthy is that geopolitical uncertainties usually support gold prices.

However, at present, the combination of high bond yields, expensive energy costs, and a strong U.S. dollar is outweighing the demand for risk aversion.

Similar conflicts occurred earlier this month: High inflation data in the United States caused both gold and Bitcoin to fall, despite gold's institutional demand setting a record at that time.