The ongoing escalation of US-Iran conflict has reignited rate hike expectations, putting pressure on gold prices which have retreated.
Over the weekend, the US and Iran launched further strikes against each other, leading to a dispute over the operational status of the Strait of Hormuz. Iran claimed the waterway would be closed "until further notice," a statement promptly denied by the US. Energy prices rose in response, significantly increasing market concerns that the Federal Reserve may be forced to maintain high interest rates to curb inflation. Gold prices fell by as much as 1.4% on Monday, dropping to around $4,060 per ounce, a single-day decline matching the entire loss from the previous week.
The resurgence of interest rate risk has cast a shadow over the short-term outlook for the gold market. Minutes from the Fed's June meeting last week revealed that a minority of officials had already presented arguments in favor of a rate hike, although the final decision was to hold steady. Meanwhile, Fed Chair Wash will make his first appearance before Congress this Tuesday, with the June Consumer Price Index (CPI) data also scheduled for release earlier that same day. These two events are likely to jointly influence the policy direction for July.
Strait Dispute Ignites Energy Inflation Expectations
According to reports, the US Central Command stated that US forces began a third round of strikes against Iran for the week. The statement indicated this action followed an attack by Iran's Islamic Revolutionary Guard Corps on a Cyprus-flagged container ship transiting the Strait of Hormuz. With the US and Iran offering conflicting accounts regarding the Strait's openness, the market quickly priced in the risk of energy supply disruptions.
Inflationary pressures stemming from rising oil prices have been directly transmitted to interest rate expectations. The Fed's June meeting minutes showed that while concerns about the labor market have slightly eased, officials' vigilance regarding inflation is on the rise. A high-interest-rate environment directly suppresses precious metals, which do not generate interest income.
Analyst Hebe Chen from Vantage Markets in Melbourne stated, "The rekindled geopolitical tensions have once again impacted the already fragile gold market. Unless there is a substantive easing in the Strait of Hormuz situation, high oil prices, stronger yields, and a firm US dollar will continue to pressure gold prices this week."
Gold Has Fallen Over 20% from Its Peak
Since the outbreak of the Iran conflict in late February this year, gold has fallen by more than one-fifth, effectively ending a three-year bull run. A wave of large-scale profit-taking once pushed the price below $4,000, a level not seen since last November.
On Monday morning, spot gold was down 1.1% at $4,073 per ounce; silver fell 1.8% to $58.82 per ounce; platinum and palladium also weakened; the Bloomberg Dollar Spot Index rose 0.2%.
It is noteworthy that despite the clear downtrend in gold prices, there is currently little evidence of investors building large-scale short positions to bet on further declines. A systemic consensus for shorting the market has not yet formed.
Hedge Fund Long Positions Drop to 115,000 Contracts
Data from the US Commodity Futures Trading Commission shows that for the week ending July 7, COMEX gold speculators' net long positions decreased by 1,964 contracts to 114,854, dropping to approximately 115,000 contracts and continuing the recent trend of contracting positions.
Other precious and industrial metals also saw reduced positioning: COMEX silver speculators' net long positions fell by 616 contracts to 12,131; speculative net long positions in copper decreased by 970 contracts to 60,397. Overall, speculative capital in the commodity market is in a state of watchful contraction, awaiting further clarity on the geopolitical situation and macro policy direction.
This Tuesday, Wash's congressional debut and the June CPI data will be released on the same day. The market will then look for more clues regarding the Fed's July decision, and the direction of gold will largely depend on the signals released by these two major events.
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