The global gold market is experiencing a tense "safe-haven paradox." As the Middle East conflict enters its sixth day, with oil prices surging and inflation concerns looming, gold should typically serve as an investor refuge. However, this dynamic has been overturned by a strengthening US dollar and sharply rising US Treasury yields. On Thursday, spot gold fell sharply by 1.2%, closing at $5,080.88 per ounce. Although it reached an intraday high of $5,194.59, it ultimately succumbed to pressure from these two dominant forces. The April gold futures settlement price also declined by 1.1% to $5,078.70. This scenario has left many bullish investors exclaiming about the "failure of safe-haven assets." In early Asian trading on Friday, spot gold saw slight gains and is currently trading around $5,095 per ounce.
Gold's price volatility, from the historic peak of $5,594.82 reached on January 29th to briefly surpassing $5,400 earlier this week and now falling rapidly, reflects the market's difficult choice between the forces of war, inflation, and monetary policy. Bart Melek, Global Head of Commodity Strategy at TD Securities, noted, "The market is focused on rising oil prices and inflation risks, while climbing US Treasury yields are typically negative for gold."
Spot gold retreated quickly, with futures also under pressure. After opening on Thursday, gold prices initially rose briefly due to escalating Middle East tensions but soon turned lower. The gap between the intraday high of $5,194.59 and the close at $5,080.88 was over $110. This "rally and retreat" pattern was not coincidental but a direct result of simultaneous strength in the US Dollar Index and Treasury yields. The US Dollar Index rose 0.25% to close at 99.05, making dollar-denominated gold more expensive for overseas buyers. Concurrently, the yield on the 10-year US Treasury note climbed to a three-week high, increasing the opportunity cost of holding non-yielding gold.
It is noteworthy that the CME Group recently announced a reduction in the initial margin requirement for COMEX 100 gold futures from 9% to 7%, and for silver futures from 18% to 14%. While this move aims to lower trading barriers and boost market liquidity, it appears to have limited impact amid the current turbulent conditions. Investors are still weighing whether safe-haven demand driven by war can outweigh the dual pressure from yields and the dollar.
Middle East conflict intensifies on sixth day, soaring oil prices fuel inflation worries. As the conflict entered its sixth day, military actions by US-Israeli forces against Iran escalated. Local residents reported intensified bombings, and the US previously attacked an Iranian warship away from the main conflict zone, prompting vows of comprehensive retaliation from Iran. Former President Trump stated in an interview his desire to "participate in selecting Iran's next leader" and explicitly rejected the succession of Khamenei's son. This rhetoric has worsened the situation, with alerts extending to the coasts of Azerbaijan and Sri Lanka, and multiple European countries, indicating an unprecedented widening of the conflict.
Consequently, oil prices surged sharply: US crude soared 8.91% to $81.29 per barrel, while Brent crude rose 5.17% to $85.61 per barrel, accumulating a gain of over 18% since the conflict began. Soaring energy prices directly increase inflation expectations, raising concerns that the Federal Reserve's interest rate cut path could be significantly disrupted. Bart Melek emphasized that it is this combination of "rising oil prices and inflation risk" that is rapidly dimming gold's traditional safe-haven appeal.
Dual rise of dollar and Treasuries leads to collective "failure" of traditional safe havens. The US Dollar Index reached an intraday peak gain of 0.6%, hitting 99.41, before closing up 0.25%. Elisabeth Colleran, Co-Head of the Emerging Markets Debt Team at Loomis Sayles, remarked, "De-dollarization was a hot topic, but when market volatility increases, the dollar inevitably strengthens." Meanwhile, the yield on the 10-year US Treasury note rose to 4.138%, and the German 10-year government bond yield also climbed to 2.829%, as investors sold bonds and flocked to the US dollar as the "ultimate safe-haven king."
Interestingly, traditional safe-haven assets like gold, German bunds, and US Treasuries were collectively sold off. The yield curve steepened, with the spread between the 2-year and 10-year yields widening to 54.4 basis points. This serves as a reminder that when inflation risks dominate the narrative, gold's non-yielding nature becomes its primary weakness.
Fed rate cut expectations halved, robust jobs data reinforce policy caution. US initial jobless claims held steady at 213,000 on Thursday, with February layoffs declining significantly, indicating continued labor market resilience. The Federal Reserve also stated that "recent activity has increased slightly, prices continue rising, and employment levels remain stable." Market expectations for a rate cut at the March 18th meeting have completely vanished. Investors are now focused on Friday's February non-farm payrolls report, expected to show an addition of 59,000 jobs.
More critically, US interest rate futures now indicate that the total expected Fed rate cuts for this year have plummeted to just 40 basis points, down from 59 basis points before the conflict. The probability of at least a 25-basis-point cut by June has plunged to 32.2% from 75% a month ago. Rate cut expectations for the Bank of England and the European Central Bank have also been scaled back, with some institutions even speculating about a potential ECB rate hike. Jayati Bharadwaj, Head of FX Strategy at TD Securities, believes, "As long as crude oil risk premiums remain elevated, the dollar's upward trend could persist."
Expert dual interpretation: Short-term pressure versus long-term fundamental support. Despite significant short-term pressure, Bart Melek emphasizes that gold's fundamentals remain intact: "Signs of a significant rise in the US fiscal deficit will eventually appear... and there is substantial uncertainty." Factors such as war uncertainty, geopolitical risks, and long-term inflation concerns still provide underlying support for gold.
The Trump administration's hardline stance towards Iran, coupled with the US House rejecting a war powers resolution (219-212 vote supporting Trump), increases the risk of prolonged conflict. Events like the hacking of Iranian state TV and the broadcast of a video by an exiled prince highlight uncertainties regarding potential regime change. These variables could potentially restore gold's safe-haven appeal at any moment.
Outlook for gold bulls: Short-term volatility, long-term optimism remains. In summary, the current decline in gold prices is essentially due to the suppression of safe-haven demand by the combined strength of the US dollar and yields, rather than a deterioration in fundamentals. The oil price and inflation pressures stemming from the Middle East conflict act as a double-edged sword: bearish for gold in the short term, but potentially building a solid foundation for prices in the long run. Investors should closely monitor Friday's non-farm payrolls data, oil price movements, and potential retaliatory actions by Iran.
Amid unprecedented global uncertainties, gold may be experiencing "darkness before the dawn." For long-term investors, the area around $5,080 could present a strategic accumulation window. After all, when fiscal deficits, war risks, and inflation expectations converge, gold's value-preservation attributes are likely to return to the forefront. Markets are always rotating; bulls need only patiently await the next shift where "safe-haven sentiment" decisively outweighs the "yield logic."
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