Gold prices slipped on Friday and were headed for a two-week losing streak, as the yellow metal’s status as a safe haven demand took a hit from concerns over an inflationary shock from spiking oil prices.
The U.S. and Israel attack on Iran entered a thirteenth day on Friday, with no signs of slowing down. The effective closure of the Strait of Hormuz continues to disrupt oil and gas supply, prompting the U.S. Treasury Department to announce more waivers of some sanctioned Russian crude.
Spot gold XAU/USD fell 0.7% to $5,044.84/oz by 14:35 ET (18:35 GMT), while Gold Futures slipped 1.5% to $5,049.86/oz. Spot gold was set to lose about 2.5% for the week, while gold futures were on track for a 2.2% decline.
Since the conflict erupted in late February, the dollar has outperformed the gold as a safe haven of choice, even though the yellow metal is typically popular in times of geopolitical crisis. A stronger dollar weighs on gold as it makes it more expensive for foreign buyers.
Much of the oil and gas passing through the Strait of Hormuz is used in a range of products, such as fertilizer and plastics, meaning that the sudden uptick in their prices could lead to heavy inflationary pressures in economies around the world.
These fears may translate into central banks, including the Federal Reserve, reconsidering possible interest rate cuts in the near-term. Higher borrowing costs may attract more foreign investment, bolstering the appeal of the U.S. dollar. The dollar index, which track the greenback against a basket of rival currencies, has jumped as the conflict has intensified.
Gold has been trading within a $5,000-$5,200/oz range since the onset of the war in late February. While the yellow metal was still trading up for the year, it has retreated from a record high near $5,600/oz notched earlier this year.
"Investors now believe that the Federal Reserve may keep interest rates elevated for longer as this month’s surge in energy prices should add to existing inflationary pressures. Despite this, geopolitical tensions continue to provide some underlying support for the precious metal. Iran’s Supreme Leader warned that U.S. military bases in the region should be shut down or face potential attacks," David Morrison, senior market analyst at Trade Nation, said.
"These offsetting factors may help to keep gold rangebound between $5,200 and $5,000. But investors shouldn’t get too complacent. Gold is no longer a ‘flight to safety’ asset as its recent behavior has shown. So be wary of another sharp move, although yet again it’s difficult to work out in which direction," Morrison said.
Other precious metals also fell on Friday and were nursing a muted performance for the week. Spot silver shed 3.3% to $81.0395/oz, and was set for a 4% weekly drop. Meanwhile, spot platinum fell 5% to $2,057.45/oz, and was on track for a nearly 5% decline.
PCE inflation data in focus
Markets were also parsing through fresh U.S. data for more cues on the world’s largest economy. Crucially, the reading is backward-looking and does not include the impact from the Iran conflict.
A gauge of underlying U.S. inflation closely monitored by the Federal Reserve rose by 3.1% in the twelve months to January, in line with expectations and slightly faster than December’s pace of 3.0%. Removing volatile items like food and fuel, the so-called "core" personal consumption expenditures price index increased by 0.4% month-on-month in January, matching both analysts’ estimates and December’s rate.
The headline PCE reading stood at 2.8% year-on-year, compared to projections that it would equal January’s rate of 2.9%. Month-on-month, the reading was 0.3%, meeting expectations and cooling versus December.
The Fed has set a 2% target for inflation. Policymakers are due to take their next interest rate decision at the end of a two-day meeting next week, with markets widely betting that borrowing costs will be held at a range of 3.5% to 3.75%.
Elevated rates typically push gold prices down, as income-generating assets like bonds become more attractive.
"The January personal income and spending data feel even more dated in the wake of the ongoing conflict in Iran. Consumer spending momentum continued at the start of the year, but a modest pullback in discretionary services categories of spending signals some signs of caution among consumers, even ahead of the recent oil-price shock," Wells Fargo’s Tim Quinlan said.
"Consumer inflation remained contained at the start of the year. But the ongoing conflict in Iran is likely to dent households’ purchasing power in coming months amid higher gasoline prices," Quinlan added.
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