Spot gold climbed 0.93% on Monday to settle firmly above the $4,400 mark at $4,416.43 per ounce, after touching an intraday high of $4,428.87, while U.S. gold futures for December delivery also gained 0.8% to close at $4,473.70. Since the shockingly weak U.S. nonfarm payrolls report in early August, bullion has charged relentlessly upward from the $4,000 threshold, a rally so aggressive it has caught the attention of the entire market.
At first glance, a softer dollar and fading expectations for Federal Reserve rate hikes form the most direct twin-engine drive behind this surge. But simultaneously, the expiration of the U.S.-Iran memorandum of understanding has Tehran threatening to shift to a full offensive posture, Washington ruling out extending the ceasefire agreement, and President Trump threatening to bomb Oman—all of which sent oil prices soaring more than 3% on Monday, giving bulls reason for caution. The inflation panic triggered by the recent spike in energy prices is quietly emerging as a sword hanging over gold's head. Geopolitical conflict, traditionally viewed as a safe-haven "booster," could now paradoxically suppress gold's upside by driving energy costs higher.
In early Asian trading on Tuesday, spot gold edged up slightly, hovering near $4,420 per ounce.
Dollar Rout: A String of Disappointing Economic Data Gives Gold Its Most Solid Support
The classic inverse correlation between gold and the dollar has been on full display in this rally. The U.S. dollar index, which measures the greenback against a basket of major currencies, sank to its lowest level since early June at 99.28 during Monday's session, and although it clawed back some ground to close at 99.57, breaching the psychologically critical 100 level is itself a powerful signal.
Why is the dollar so weak? The root cause lies in a cascade of disappointing U.S. macroeconomic data. July retail sales posted their first decline in nine months, joining last month's unexpectedly soft nonfarm payrolls and muted inflation readings to form a triple blow. Kit Juckes, chief FX strategist at Societe Generale, minced no words: "The U.S. has released a series of weak data points, with both nonfarm payrolls and retail sales underperforming. This will, to some extent, recalibrate market expectations for the pace of Fed policy tightening." He further noted that this "reflexive reaction" is partly responsible for the dollar's decline.
Even more intriguing is the positioning picture. Juckes added that CFTC data shows dollar net long positioning is "very, very, very large," and these positions are highly vulnerable to squeezing in the seasonally thin trading of late August, forcing a wave of speculative dollar longs to unwind and accelerating the greenback's slide. For gold, a weaker dollar means enhanced purchasing power for buyers using other currencies, injecting a powerful shot of adrenaline into global bullion demand.
Rate Hike Expectations Plummet: Markets Begin to Believe the Fed Will Tolerate Inflation
If the weaker dollar is the "catalyst" for gold's rise, then the sharp collapse in Fed rate hike expectations is the true "ignition switch." The CME FedWatch tool shows traders now price just a 33% probability of a September rate hike, down sharply from 51.2% a month ago, and by August 18 that figure had slipped further into the 30%-35% range, with the odds of holding rates steady standing above 65%. In just one month, the market's view of the Fed's policy path has executed nearly a complete 180-degree turn.
The core driver of this shift is precisely the weak employment and inflation data. Subpar nonfarm payroll growth and a moderate consumer price index have forced the market to reassess the Fed's tightening headroom. Bart Melek, global head of commodity strategy at TD Securities, summarized the situation: "The gold market appears to be pricing in a stagflationary environment, given weak employment data and expectations that the Fed will tolerate current inflation levels." The so-called "tolerating inflation" means that even if prices remain above target, policymakers may choose to stand pat due to lackluster growth—a scenario extremely favorable for gold, as real interest rates struggle to rise significantly, keeping the opportunity cost of holding bullion low.
Investors are now eagerly awaiting Wednesday's release of the Fed's July meeting minutes, hoping to glean policymakers' true interpretation of recent data. Lou Brien, market strategist at DRW Trading, cautioned that bond markets reacted nervously after Fed Chair Warsh's first press conference last month, and these minutes will draw intense scrutiny because "Warsh has not yet dispelled the market's perception that he is Trump's man at the Fed, rather than an independent voice." Any subtle wording shift in the minutes could trigger a repricing of rate hike probabilities.
The Middle East Powder Keg: Surging Oil Prices Light the Inflation Fuse, Gold's Hidden Threat Approaches
In stark contrast to the two clearly bullish factors above, the impact of Middle East geopolitical conflict on gold has become extraordinarily complex, even harboring bearish undertones. Monday marked the deadline for a final peace agreement between the U.S. and Iran under the June 17 memorandum of understanding, but reality shows peace remains elusive while war threats have escalated further. A senior Iranian official stated that if diplomatic efforts fail, Tehran will shift to a "full offensive" military posture, escalating tensions in the Strait of Hormuz and the broader region. President Trump's response was equally bellicose—he bluntly said Iran "should raise the white flag and surrender," and threatened that "if Oman interferes, we'll bomb them to smithereens."
The direct consequence of this war of words was a surge in international oil prices. Brent crude futures rose $2.35, or 2.65%, to settle at $90.87 per barrel on Monday, while U.S. crude futures gained $2.10, or 2.55%, to close at $84.50. Shipping data from the Strait of Hormuz vividly reflects supply concerns—Kpler data shows a dramatic slowdown in shipping over the weekend, with just five commodity carriers transiting on Saturday and no vessels registered on Sunday, compared to 31 ships the previous weekend.
And it is precisely the rise in oil prices that constitutes the biggest lurking worry for gold bulls. The traditional safe-haven logic for gold certainly exists—war threats will trigger some haven buying—but this buying can easily be offset by a more powerful force: higher oil prices push up overall inflation, which in turn strengthens expectations that the Fed will continue hiking rates. As U.S. interest rate futures markets show, while the September hike probability currently stands at just 33%, that figure is far from static; any signal of inflation overshooting could push it back up.
Looking at history, gold surged during the stagflation of the 1970s because inflation spiraled out of control while the Fed was powerless to hike. But the current environment is fundamentally different—the Fed remains in a tightening cycle, policy rates have yet to peak, and if sustained high oil prices force the Fed to reconsider hikes, rising real rates would directly pressure gold. In other words, Middle East conflict, through the transmission chain of "oil → inflation → rate hike expectations → dollar strength (relative) → gold pressure," is becoming the most dangerous hidden landmine on gold's upward path.
Phil Flynn, senior analyst at Price Futures Group, acknowledged that with escalating rhetoric and higher oil prices, uncertainty about whether ships can transit the Strait of Hormuz is amplifying market concerns. But Bjarne Schieldrop of SEB Research calmly pointed out that unless overnight crude shipments through the Strait of Hormuz halt and/or the Bab el-Mandeb Strait is blockaded, oil prices are unlikely to surge dramatically. With crude trading near $90, the market is weighing the possibility of further supply disruptions against the reopening of the Strait. Meanwhile, U.S. Energy Secretary Wright bluntly stated that Iran currently cannot export oil as part of an "economic strangulation" strategy, adding that "the world doesn't need Iran's oil"—a signal that Washington has no intention of compromising in the near term, suggesting geopolitical tensions will persist.
Market Battle: Three Forces Ebb and Flow, the Fragility of Gold's Rally Cannot Be Ignored
Examining these three dimensions side by side, it becomes clear that the current gold market is in a delicate balancing act. The bullish forces come from a weaker dollar and cooling rate hike expectations, which together lower the opportunity cost of holding gold and provide solid underlying support. The bearish force comes from Middle East conflict-driven oil price gains and the resulting inflation panic, which could re-ignite the Fed's resolve to hike and reverse the currently favorable setup.
So which side is the market currently favoring? Judging by gold's actual price action, the bullish forces hold the upper hand in the near term—because weak economic data is a "fait accompli," while oil-driven inflation concerns remain at the "expectation" stage. But investors must remain vigilant: this balance is extremely fragile. Should Wednesday's Fed minutes reveal any hawkish language on inflation, or should oil prices continue to break higher, rate hike probabilities could quickly rebound, subjecting gold to dual pressure: a negative reaction to the hikes themselves, and a stronger dollar as hike expectations recover.
Lou Brien of DRW Trading noted that the market has become "somewhat numb" to the threat of U.S.-Iran conflict, but that numbness itself indicates geopolitical risk is already priced in, and fresh escalation could trigger unexpected volatility. Signals from the U.S. Treasury yield curve are also worth watching—the 10-year yield stands at 4.728%, while the 30-year at 5.314% marks a nearly 20-year high. The relentless climb in long-end yields reflects deep market anxiety over long-term inflation and fiscal deficits—anxiety that underpins gold's long-term value, but if short-end yields follow suit on rebounding hike expectations, the short-term pressure on gold would be significant.
Conclusion: How Long Can Gold's Sweet Spot Last? It All Depends on the Race Between Inflation and Rate Hikes
Taking everything into account, gold's current position above $4,400 is the result of a multi-force tug-of-war at this particular juncture. Weak economic data gives the Fed ample reason to pause rate hikes, and dollar weakness provides direct pricing support for gold—these two core bullish factors are unlikely to be disproven in the near term, meaning gold's floor is relatively solid. Technical signals for the short term have also strengthened noticeably, with key resistance around the 200-day moving average near $4,507 per ounce.
However, the double-edged sword of Middle East geopolitical conflict is growing sharper—it can provide some residual warmth to gold on the safe-haven front, but more importantly, it amplifies inflationary pressure by driving up oil prices, potentially shaking the market's faith in the Fed's "inflation tolerance." The key going forward lies in a race between two threads: first, whether U.S. economic data deteriorates further, cementing the no-hike case; and second, whether oil prices keep climbing, eroding the room for standing pat. If the Fed's July minutes reveal greater concern about downside economic risks, rate hike probabilities could fall further, allowing gold to push higher. Conversely, if the minutes or subsequent official comments emphasize inflation risks, or if conditions in the Strait of Hormuz deteriorate sharply enough to push oil above $95 or even $100, then rebounding hike expectations would quickly reverse the current favorable landscape.
Gold investors are currently feasting on a weaker dollar and dovish expectations, yet they must constantly beware of the Middle East "inflation bomb" that could detonate at any moment. Whether this feast can continue may become clearer with Wednesday's Fed minutes. Until then, every new high in gold prices carries increasingly greater fragility.
As of 07:50 Beijing time, spot gold was trading at $4,423.33 per ounce.
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