Spot gold declined 0.69% overall last week, closing at $4506.82 per ounce on Friday, May 22, as the market was firmly pressured by inflation concerns stemming from high oil prices. However, at the start of the Asian trading session on Monday, May 25, the price of gold suddenly gapped higher and surged, climbing as much as 1.59% to around $4578 per ounce, demonstrating strong rebound momentum. This dramatic turnaround was driven by a dual catalyst: a rapid easing of Middle East geopolitical tensions and a weakening U.S. dollar. Concurrently, subtle shifts in internal Federal Reserve policy signals have added further uncertainty and potential to the outlook for gold.
Last week's decline was primarily attributed to persistently high energy prices. Conflict involving Iran led to disruptions in shipping through the Strait of Hormuz, keeping international oil prices elevated and directly fueling global inflation expectations. Interest rate futures indicated the market's probability for at least one 25-basis-point Fed rate hike within the year had climbed to 67%. Against this backdrop, the appeal of gold as a non-yielding asset significantly diminished.
Comments from Fed Governor Waller further intensified market anxiety. Previously viewed as relatively dovish, Waller unexpectedly called for the Fed to abandon its "accommodative bias" and open the door to potential rate hikes. He stated plainly that discussing further rate cuts amidst persistent inflation that is spreading from goods to services would be "crazy." This hawkish stance swiftly pushed market pricing for monetary tightening higher, causing a notable sell-off in gold on Friday, with prices briefly falling below the $4500 level.
Since the outbreak of conflict in the Middle East in late February, gold has fallen approximately 14% cumulatively. Trapped under the triple pressures of high interest rates, high inflation, and low growth expectations, investors have been weighing safe-haven demand against opportunity costs, keeping gold prices within a relatively narrow trading range.
The sharp rebound during the Asian session on Monday, May 25, was entirely ignited by news of geopolitical de-escalation. Market optimism that the U.S. and Iran are nearing a peace agreement caused oil prices to gap lower by over $5, briefly dropping to a two-week low of $91.25 per barrel. This shift quickly alleviated investor fears about persistently high energy-driven inflation, providing significant upward momentum for gold.
Simultaneously, the U.S. Dollar Index also gapped lower and declined, falling 0.35% to 98.97, further fueling gold's rise. Other precious metals also strengthened, with spot silver gaining over 4%, and platinum and palladium both rising more than 2%, indicating a clear short-term recovery in market risk sentiment.
The announcement on social media on Saturday, May 23, that the U.S. and Iran had "largely agreed" on a peace memorandum of understanding to reopen the Strait of Hormuz quickly circulated globally. While key details remain unresolved between the parties, the signal that a "light is visible" was sufficient to boost market sentiment. Although Iran emphasized it would continue to manage the strait, its agreement to restore ship traffic to pre-conflict levels is a significant positive for the global energy supply chain.
Progress in U.S.-Iran negotiations is not smooth but filled with dramatic tension. On one hand, positive signals were released, stating an agreement would prevent Iran from obtaining nuclear weapons; on the other hand, a "fifty-fifty" suspense was left—either a good deal is reached, or a large-scale military strike is launched. This "talk and fight" strategy maintains negotiation pressure while leaving room for market speculation.
Iran's response has been cautious yet firm. They emphasized that the current focus of talks is ending the "imposed war," with core demands including sanctions relief and the release of frozen assets, explicitly stating these would not be linked to nuclear issues. Iran also showed no concession on its management rights over the Strait of Hormuz, indicating that even if an agreement is reached, the strait would not fully return to its pre-conflict "free passage" state.
Strong dissatisfaction from Israel has become a key variable in the negotiations. Israel fears an agreement could compromise its security interests and continues to face multi-front pressure on the battlefield. Concurrently, Gulf states are highly wary of a potential Iranian proposal to establish a "Persian Gulf Strait Authority," indicating the struggle for control over the strait is far from over.
Nevertheless, confirmation that a draft agreement has gained support from several Middle Eastern countries, with the next round of talks potentially opening on June 5 and a preliminary accord possibly named the "Islamabad Declaration," collectively form the core catalyst for gold's short-term rebound.
On another front for gold, a shift in Federal Reserve policy remains a critical variable. The newly appointed Chairman faces a dual test of inflationary pressures and political maneuvering. Waller's urging to remove the "accommodative bias" from policy statements, opening the door to rate hikes, has led the market to bring forward its expectation for the first hike to October or even September.
The U.S. Consumer Confidence Index for May plummeted to a record low, with significant declines among Republicans and independent voters, highlighting the severe impact of high oil prices on ordinary citizens. Despite stock market strength driven by negotiation progress and corporate earnings, with the Dow hitting new highs, the actual consumer experience is starkly different. High inflation is eroding real incomes, and long-term inflation expectations have also risen noticeably.
While emphasizing the Fed's dual mandate of price stability and maximum employment, balancing the growth demands of the current administration with the responsibility to combat inflation remains a significant challenge. This implies gold will continue to face pressure from changes in the real interest rate environment over the medium term.
In summary, positive progress in U.S.-Iran talks has provided a temporary respite for gold in the short term, with falling oil prices and a weaker dollar jointly creating upward momentum. However, the sustainability of this rebound depends on the final outcome of the negotiations. If an agreement is finalized and Strait of Hormuz shipping recovers quickly, inflationary pressures would ease significantly, potentially weakening gold's safe-haven appeal for a period.
Conversely, if talks break down or see reversals, leading to renewed Middle East tensions, gold would have a basis to resume its upward trend. Simultaneously, the Federal Reserve's monetary policy path will be a decisive factor—if persistent inflation leads to a prolonged rate hike cycle, gold will remain under pressure; if deteriorating economic data triggers a policy pivot, gold could see a stronger rebound.
Currently, gold prices are forming a new focal point for contention within the $4500-$4600 range. Investors need to closely monitor the June Fed meeting, the next round of U.S.-Iran talks on June 5, and concurrent movements in oil prices and the Dollar Index. In the complex tug-of-war between geopolitical easing and monetary policy tightening, gold is entering a critical window characterized by high volatility, presenting both opportunities and risks.
Furthermore, this week is a short trading week due to the Memorial Day holiday on Monday, with U.S. stock markets closed and gold markets closing early. However, when traders return on Tuesday and the Consumer Confidence survey is released, economic data may show some improvement. Following the negative surprise from the University of Michigan Consumer Sentiment survey last Friday, market participants will be particularly focused on this indicator.
The remaining economic data for the week will be released on Thursday, when traders will focus on the preliminary Q1 GDP and PCE figures, weekly jobless claims, and April data for durable goods orders and new home sales, which investors should watch closely.
(Spot gold daily chart, source: Yi Hui Tong) At 07:36 Beijing Time, spot gold is trading at $4577.15 per ounce.
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