On May 26, ATFX reported that U.S. President Donald Trump stated on Monday that negotiations with Iran over extending a ceasefire agreement and easing restrictions on the passage through this key waterway are "progressing well." As the U.S. and Iran made headway in reaching a deal to reopen the Strait of Hormuz and resume oil shipments, gold prices, after a rebound on Monday amid easing inflation concerns, pared some gains this morning, hovering around $4,550 per ounce.
However, the market is also closely monitoring potential attacks that could disrupt the talks, as Iran demands that any peace agreement must include a cessation of hostilities in Lebanon. Local media reported an explosion in the Strait of Hormuz, a transit route approved by Tehran for vessels. Additionally, Israel indicated it would intensify strikes against Hezbollah while U.S.-Iran negotiations are ongoing.
Since the conflict erupted in late February, gold prices have fallen by approximately 13%. As the war drove energy prices higher and heightened inflation concerns, traders increased bets on interest rate hikes. Gold itself does not pay interest, so higher borrowing costs exert pressure on its price.
Previously, the market worried that an escalation in U.S.-Iran tensions leading to a blockade of the Strait of Hormuz could cause international oil prices to surge, thereby increasing inflationary pressures in the U.S. Elevated inflation would, in turn, force the Federal Reserve to adopt more aggressive rate hikes. With news of "progress" in U.S.-Iran talks, the market began to anticipate a decline in oil prices, reducing the risk of runaway inflation. This, conversely, alleviated concerns about aggressive Fed tightening and became a key driver for gold's rebound. Moreover, during gold's previous decline, the market accumulated substantial short positions (bets on further price drops). When clear positive signals for peace talks emerged over the weekend, these shorts were forced to quickly buy back to cover their positions, amplifying the short-term upward move.
Nevertheless, while progress has been made toward a U.S.-Iran peace agreement, the probability of a deal being reached in the near term has increased but is not yet certain. The U.S. and Iran still have "substantive differences" on core issues such as control over the Strait of Hormuz and the scope of sanctions relief. Iran has explicitly stated that managing the strait is a matter of its sovereignty and will not discuss specific details in a memorandum with the U.S. Both parties are currently in a critical window for reaching an interim agreement, suggesting that any rebound in gold prices may be relatively moderate. This also implies that gold's reaction to certain news may be "relatively muted." As institutions note, given that key details of Iran's nuclear program remain undisclosed, investors may be reluctant to chase gold's rebound.
Additionally, the market is focusing on the Federal Reserve's interest rate outlook. With the new Chair, John Warsh, taking office, discussions about whether rates will be raised within the year have intensified. Investors will seek clues about his views on the economy. Since gold does not generate interest, the opportunity cost of holding it is high. When the market expects interest rates to rise, funds tend to flow toward assets that provide yield, such as Treasury bonds, thereby suppressing gold prices. Analysts generally believe that as long as expectations for rate hikes persist, any rebound in gold may be viewed as a correction of previously overly pessimistic sentiment rather than a trend reversal.
ATFX's perspective indicates that currently, gold's trajectory will depend on the tug-of-war between U.S.-Iran developments and Federal Reserve officials' remarks. Upward momentum comes from easing geopolitical risks and short-covering driven by cooling inflation expectations, but even if a U.S.-Iran deal is reached, it will be crucial to see whether crude oil shipments through the Strait of Hormuz truly return to normal. Downward pressure stems from whether expectations for Fed rate hikes intensify. When the market anticipates further rate increases, institutions tend to reduce gold holdings and increase allocations to short-term bonds or money market funds. Such capital flows would exert sustained pressure on gold prices. As long as Fed officials continue to emphasize "further tightening if necessary," any rebound in gold may be seen by the market as an opportunity to sell on rallies rather than a genuine trend reversal.
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