Gold pared the majority of its earlier gains as escalating conflict in the Middle East drove energy prices higher, prompting traders to assess the potential for central banks to scale back monetary easing measures.
After an initial decline of 0.3%, gold prices shifted to an increase of approximately 0.2%. Earlier in the session, heightened safe-haven demand had pushed prices to a one-month peak. The upswing followed a significant escalation in Middle Eastern tensions over the weekend, marked by attacks from the US and Israel on Iran, with Tehran subsequently launching missile counterstrikes. In contrast, silver and palladium prices experienced declines.
The surge in risk-off sentiment on Monday contributed to a downturn in global equities. US Treasury yields also fell, reflecting concerns that rising oil prices and increased government spending could fuel inflationary pressures. Oil prices recorded their most substantial single-day gain in four years.
Frank Monkam, Head of Cross-Asset Macro Strategy and Trading at Buffalo Bayou Commodities, noted that gold's upward momentum was being capped as traders began factoring in heightened inflation risks. This scenario could potentially compel the Federal Reserve and other global central banks to maintain or increase interest rates to counter rising price pressures. Indeed, traders in interest rate swaps have already reduced their bets on the extent of future rate cuts. Higher interest rates generally pose a headwind for non-yielding assets like gold.
However, the broader context supports a long-term bullish outlook for gold. Key factors include the potential spread of geopolitical tensions, significant upheavals in international relations and trade instigated by the US President, robust buying from central banks, and a wider shift of investor assets away from sovereign bonds and currencies.
Prior to the conflict with Iran, the US administration had adopted an increasingly assertive foreign policy stance. Actions earlier in the year included the detention of Venezuela's then-president and threats regarding the potential annexation of Greenland. As Washington initiated its largest military buildup in the Middle East since the 2003 Iraq war, gold prices achieved a seventh consecutive monthly gain in February, marking the longest such streak since 1973.
As of 11:28 AM New York time, spot gold was up 0.55%, trading at $5,308.20 per ounce. Silver declined by 6.3%, while palladium fell 1.5%. The Bloomberg Dollar Spot Index advanced by 0.8%.
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