Gold gains as October Fed rate hike prospects fade

By Ashitha Shivaprasad

Oct 5 (Reuters) - Gold prices drifted higher on Monday after recent soft economic data sharply lowered expectations of a Federal Reserve rate hike in October, increasing the appeal of the non-yielding asset.

Spot gold was up 0.4% to $4,158.17 per ounce by 0150 GMT. US gold futures for December delivery rose 0.6% to $4,186.40.

US job growth slowed more than expected in September, and the nonfarm payrolls count for the prior two months was revised sharply lower, data showed on Friday.

"The softer labour market data has helped dial back October Fed hike expectations, which is providing gold some support. But the market is still treating the Fed’s broader hiking cycle as intact even if a pause occurs in October," said Tim Waterer, chief market analyst at KCM Trade.

Traders now see a 22% probability of a Fed rate hike in October, down from 64% a week ago, while still pricing in an 87% chance of an increase in December, according to the CME FedWatch Tool.

The US central bank last month raised its benchmark overnight interest rate by 25 basis points to the 3.75%-4.00% range, its first rate increase in three years.

On the geopolitical front, Yemen’s Saudi-backed, internationally recognised government said on Sunday it was launching a major military campaign to recapture all areas controlled by the Iran-backed Houthis.

"Middle East developments will continue to matter for gold, particularly through their impact on oil prices and the broader inflation outlook. Volatility is likely to remain elevated while oil, yields and Fed expectations stay in flux," said Waterer. US/

Oil prices slipped as rising crude exports from the Middle East and G7 nations' release of oil added to supplies despite ongoing concerns about further damage to Gulf oil infrastructure amid the Iran war. O/R

Among other metals, spot silver gained 1.7% to $61.40 per ounce, platinum was up 0.6% to $1,708.48 and palladium firmed 0.6% to $1,175.04.