Last week (July 6-10), renewed military tensions between the US and Iran over control of the Strait of Hormoz, coupled with rising US Treasury yields, led markets to revert to trading on tightening expectations, once again disrupting the window for a gold rebound. Economic data also indicated continued expansion in the US economy, reducing the perceived necessity for policy easing and further capping gold's potential for a significant rally.
Market Perspective
In terms of market views, the gold market faced renewed pressure and declined last week, with the international gold price fluctuating around $4,100. Former US President Trump stated that the US-Iran understanding had been terminated, while Iran's Revolutionary Guard Corps announced the re-closure of the Strait of Hormuz. Post-ceasefire negotiations between the US and Iran have not progressed smoothly, with the situation remaining volatile. This has dampened market risk appetite and made the path for the inflation trend to decline more complex.
The US ISM Non-Manufacturing PMI for June came in at 54, slightly below expectations and the previous reading. While price pressures showed some easing, they remain elevated. The employment component returned above the expansion-contraction threshold, and the equilibrium in the job market has reduced the policy impetus for easing measures. The minutes from the Federal Reserve's June meeting indicated robust economic growth, with increased contributions from AI-related investments. Monetary policy remains focused on upside risks to inflation in the near term, with AI-related demand, Middle East conflicts, and tariffs potentially keeping inflation elevated, complicating any move towards easing. This sentiment has also weighed on the market mood for a gold rebound.
Overall, we maintain the view that gold may be consolidating and forming a base around the $4,000 level. Despite ongoing volatility in the Middle East situation, constraints from the midterm elections suggest a low probability of a significant escalation of the conflict by Trump. The current assertive actions from both sides are likely aimed at gaining leverage for negotiations. Building a base for gold will take time, but the scope for irrational declines appears limited.
Last Week's Market Developments
Regarding market dynamics last week, US-Iran relations shifted from talks to clashes within a week. On July 9, following a national security assessment, the US side stated it would continue technical dialogue. On July 10, Qatar engaged in mediation with Iran, the US demanded Iran publicly commit to ceasing attacks on vessels, and Trump announced the June ceasefire had ended. On July 11, Iran's Revolutionary Guard Corps attacked a Cyprus-flagged container ship and declared the strait closed, prompting the US to immediately launch strikes against Iran. Consequently, the negotiation agenda has regressed from technical implementation of nuclear issues to restoring the ceasefire, reopening the strait, and providing security guarantees.
June FOMC Minutes Highlight Inflation Trend
The minutes from the Federal Reserve's June FOMC meeting emphasized that participants viewed risks to the inflation outlook as still tilted to the upside, primarily due to lagged tariff effects, energy and supply chain shocks, and strong demand driven by AI. Furthermore, the minutes indicated that if inflation subsides, the Fed could maintain or gradually lower rates. However, if persistent high inflation is driven by AI demand, Middle East conflicts, or tariffs, further policy tightening might be necessary. This suggests that future inflation trends are likely a core variable for Fed decision-making.
US June ISM Services PMI Declines
The US ISM Services PMI for June fell to 54.0. Both the business activity and new orders indices declined, while the employment index rose by 3.3 points to 51.2, marking its first expansion in four months. The prices index dropped by 4 points to 67.7, indicating some easing in cost pressures. Overall, the US labor market remains in a state of equilibrium.
Risk Considerations
Recent gold price volatility has been significant. Investing in gold funds requires a full understanding of the associated risks, and decisions should be made prudently based on one's own risk tolerance. It is also advisable to continuously monitor global macroeconomic trends, central bank gold purchases, and relevant policy developments.
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