Oil at $100 and Rate Hike Fears Pressure Gold at $4,000 Support Level
Spot gold is trading around $4,050 an ounce, erasing most of the gains from the previous two sessions that were driven by bargain hunting, after a 2% drop the day before. This decline is fueled by concerns that the expanding conflict in the Middle East is intensifying energy price pressures, which in turn raises expectations that the Federal Reserve will tighten monetary policy further to curb inflation.
The conflict has entered a new escalation phase after a ceasefire agreement signed last month effectively collapsed. Former President Donald Trump has threatened to increase strikes against Iran and stated he would hold Tehran responsible for any future attacks on ships in the Red Sea by Yemen's Houthi rebels. Benchmark Brent crude oil has breached the $100 per barrel mark for the first time since May, while the two-year U.S. Treasury yield has risen for a sixth consecutive day on Thursday.
Adding to the uncertainty, the U.S. announced it will impose tariffs of 10% to 12.5% on imports from most major trading partners, citing forced labor in their supply chains. This is the most extensive action Trump has taken to restore his protectionist tariff regime since the Supreme Court overturned his earlier measures. Rising energy prices, combined with a seemingly resilient U.S. labor market, are increasing the likelihood of a Fed rate hike. Higher borrowing costs are a negative factor for non-yielding precious metals like gold.
Analysts at TD Securities, including Ryan McKay, noted in a report that as energy prices surge and inflation worries resurface, "fast money has quickly reverted to being a seller of gold." They added that for silver, a break below $55.19 per ounce could trigger new selling. Swap traders currently see a 34% probability of a rate hike at the Fed's meeting next week. At least one rate increase is expected by September, with a possible second one before the end of the year.
Gold has been trading largely around the $4,000 level since late June, which some traders view as a key support. Since the U.S. and Israel launched strikes against Iran in late February, the gold price has fallen by about a quarter. This follows a historic high of nearly $5,600 per ounce a month earlier, which ended a multi-year bull run. Spot gold was last flat at $4,048.25 an ounce. Silver was unchanged at $57.62 an ounce after a 3.6% decline the previous day. Platinum and palladium edged slightly lower. The Bloomberg Dollar Spot Index dipped slightly after rising 0.3% on Thursday.
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