Gold prices fell to a near two-week low in volatile trading on Thursday, pressured by a strengthening US dollar and diminishing expectations for Federal Reserve interest rate cuts. Spot gold touched a low of $4,664.28 per ounce before paring losses to settle around $4,694.07, down approximately 1% for the day. In early Asian trading on Friday, the price was hovering near $4,697 per ounce as markets continued to monitor Middle East developments and looked ahead to key central bank meetings next week.
The dual pressures of a stronger dollar and reduced rate cut expectations were the primary drivers behind the decline. The US dollar index rose for a third consecutive session, reaching its highest level since April 13. The dollar's strength, partly fueled by safe-haven demand due to Middle East instability, increased the selling pressure on dollar-denominated gold. A more significant factor was the rapid reassessment of Fed policy. Escalating tensions have driven a sharp rise in oil prices, with Brent crude surpassing $100 per barrel. This surge has stoked fears of resurgent inflation, limiting the Fed's capacity to lower interest rates. According to LSEG estimates, market expectations for total rate cuts this year have shrunk to just 7 basis points, a sharp drop from over 50 basis points before the conflict. Higher interest rates reduce the appeal of non-yielding assets like gold by increasing the opportunity cost of holding them.
US initial jobless claims data released on Thursday showed a slight increase, which might typically support gold by suggesting potential labor market weakness that could prompt Fed easing. However, markets largely dismissed the figures, with economists noting that the level of claims remains healthy historically. Furthermore, the S&P Global US Composite PMI rose in April, indicating unexpected resilience in business activity. This economic strength provides the Fed with little impetus to cut rates soon.
The underlying geopolitical tensions, particularly the struggle for control of the Strait of Hormuz, represent a critical variable influencing global risk sentiment. Iran released a video showcasing a military operation to seize a cargo ship, signaling its capability to disrupt the vital waterway. This contrasts with US assertions of control over the strait. The ongoing standoff creates market uncertainty, making decisive asset allocation difficult and explaining why safe-haven flows have not robustly supported gold.
Adding to the complexity, Israel's Defense Minister stated the country is awaiting a US "green light" to resume military action against Iran, with threats directly targeting Iran's leadership. Since the conflict began, gold has fallen over 11%, a counterintuitive move that highlights a complex transmission mechanism: the war boosts oil prices, which fuels inflation fears, thereby reinforcing the case for the Fed to maintain high rates, which ultimately weighs on gold.
Brent crude breaking above $100 per barrel is a significant milestone, driven by concerns over potential disruptions to the roughly 20 million barrels of oil transiting the Strait of Hormuz daily. While higher oil prices can boost gold's appeal as an inflation hedge, the resultant pressure on the Fed to keep rates high is currently the dominant force. Federal fund futures now price only a 24% chance of a rate cut by year-end.
Market sentiment is characterized by caution and indecision. Investors are hesitant to make large bets due to the unpredictable situation. This is reflected in bond markets, where yields have edged higher despite geopolitical risks, and in equities, which posted modest declines. The potential extension of the Lebanon-Israel ceasefire agreement offers a glimmer of hope for gold bulls, as it could prevent further escalation and provide some price support. However, this is unlikely to resolve the core issues surrounding the Strait of Hormuz or the US-Iran standoff.
In summary, gold is caught between conflicting forces. Downward pressure comes from a strong dollar, high oil prices, and fading rate cut hopes. Upward support stems from geopolitical uncertainty and potential ceasefire extensions. The traditional logic that war boosts gold is being superseded by a new chain of effects where conflict lifts oil prices, reinforcing inflation and delaying rate cuts, thereby pressuring gold. As long as the Strait of Hormuz remains a flashpoint and oil prices stay elevated, gold will likely face headwinds from interest rate expectations. A significant escalation into a broader conflict could overwhelm these factors and trigger a sharp gold price increase, but until then, the metal is likely to remain volatile. Investors are advised to maintain patience, avoid panic selling or impulsive buying, and closely monitor developments in the Middle East, Fed communications, and key economic data.
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