Global gold markets experienced a dramatic roller-coaster ride on Tuesday. Spot gold prices at one point fell to their lowest level since July 1st at $1,983 per ounce, as pessimism seemed to take hold. However, the situation reversed instantly with the release of the U.S. June Consumer Price Index (CPI) data. The gold price surged strongly from its lows, reaching a peak of $2,102.82 per ounce, and ultimately closed at $2,052.64, marking a single-day gain of 1.3%. U.S. gold futures also performed robustly, with the main contract settlement price rising 1.6% to $2,069.70.
Behind this surge is a fierce clash between two opposing forces: on one side, unexpectedly weak inflation data has cooled expectations for Federal Reserve rate hikes; on the other, escalating U.S.-Iran conflict is heating up prospects for global energy supply and inflation. Gold, as an asset possessing both monetary and safe-haven attributes, finds itself at the forefront of this tug-of-war.
During early Asian trading on Wednesday, spot gold traded in a narrow range near $2,053.17 per ounce.
Inflation Cools: Unexpectedly Weak CPI Data Drastically Lowers Rate Hike Expectations
Core CPI was flat, marking the first negative month-on-month reading in six years. Data from the U.S. Labor Department showed the Consumer Price Index rose 3.5% year-on-year in June, lower than both May's 4.2% and market expectations of 3.8%. More notably, the CPI fell 0.4% month-on-month in June, compared to a 0.5% increase in May—this marks the first negative month-on-month CPI reading in the U.S. since the early days of the pandemic in 2020. The core CPI remained unchanged in June after rising 0.2% in May.
Independent metals trader Tai Wong commented on the report, stating, "Gold surged, boosted by the surprisingly weak CPI report. While the headline CPI fell significantly, the more important takeaway is that core CPI was flat. This should significantly lower market expectations for rate hikes at the July and September policy meetings."
The market reaction was immediate. According to the CME Group's FedWatch tool, the market's expectation for at least a 25 basis point rate hike at the Fed's July meeting plummeted from 41.7% the previous day to 16.6%. For the September meeting, market pricing indicated a 59.8% probability of a hike, also down from 75.1% on Monday.
Wells Fargo Chief Economist Tom Porcelli noted in a report, "This is a very encouraging inflation report that should quiet the voices, which seem to be growing, hoping for a rate hike at the Fed's July meeting." Barclays U.S. economist Pooja Sriram also pointed out that the data "likely buys the FOMC time to hold rates steady and wait for more data."
Weaker inflation data directly pressured the U.S. dollar. The dollar index closed at 100.93 on Tuesday, down 0.37%. A weaker dollar makes dollar-denominated gold "cheaper" for holders of other currencies, providing direct monetary support for the gold price rebound. Concurrently, the yield on the 10-year U.S. Treasury note fell 3.1 basis points to 4.579%, marking its largest single-day drop since June 24th. Lower rate expectations mean a reduced opportunity cost for holding gold, further boosting its appeal.
Tensions Heat Up: U.S.-Iran Conflict Escalates, Strait of Hormuz Becomes Global Focus
From a ceasefire to full-scale hostilities, the situation deteriorated rapidly. Just as markets were beginning to cheer the inflation data, geopolitical shadows grew darker. The seemingly maintainable ceasefire between the U.S. and Iran in mid-June completely collapsed in July. Iran launched ballistic missiles at a U.S. airbase in Jordan, and the U.S. responded with a five-hour-long attack on Iranian targets. This conflict over control of the Strait of Hormuz has pushed international oil prices to their highest levels in four weeks.
U.S. Central Command subsequently announced the start of a new round of strikes against Iran, beginning at 3 p.m. Eastern Time on July 14, to "continue degrading Iran's ability to attack commercial shipping in the Strait of Hormuz." According to Iranian media reports, multiple locations in southern and southwestern Iran were attacked by U.S. forces. This marked the fourth consecutive night of U.S. attacks on Iran.
The situation at the Strait of Hormuz is particularly concerning. Data from the IMF's PortWatch monitoring agency showed only 34 vessels passed through the strait on July 5th, compared to a normal daily volume of about 88 ships. Data from trade intelligence firm Kpler is even more startling—only 14 vessels transited the strait on July 13th, with just 4 being crude oil tankers, representing a drop of about 60% compared to the same period a week earlier.
Iran's Islamic Revolutionary Guard Corps explicitly warned that as long as the U.S. continues its hostile presence in the region, Iran will not export oil or gas from the area. This puts approximately 20% of global oil supply, which transits the Strait of Hormuz, in a state of potential disruption.
Brent crude futures rose 1.7% on Tuesday, settling at $84.73 per barrel, closing at their highest level since June 12th for a second consecutive session. U.S. crude futures gained 1.5%, settling at $79.34, their highest settlement since June 15th. Analysts at Ritterbusch and Associates noted that military actions between the U.S. and Iran escalated again this week, and tensions are likely to persist.
The surge in oil prices presents a dilemma for markets: on one hand, CPI data shows inflation is cooling; on the other, rising energy prices could rekindle inflation in the coming months. Uto Shinohara, Senior Investment Strategist at Mesirow Currency Management, pointed out, "Inflation has been above target for years now, and with geopolitical tensions escalating again, energy-driven inflation risks remain high... Therefore, despite the latest CPI report showing a slowdown, the overall inflation outlook remains uncertain."
The Fed's Dilemma: Warsh's 'Declaration of Independence'
"I will continue to do my job." In this complex moment of uncertain inflation prospects and high geopolitical risks, Fed Chair Kevin Warsh's testimony before the House Financial Services Committee on Tuesday was closely watched by markets. When asked how he would respond if President Trump continued to pressure the Fed, Warsh's reply was resounding: "I will continue to do my job." He further emphasized, "The Fed's independence is sacrosanct. If we are independent, and if we are perceived as independent, our credibility is enhanced... That's how we can best do our job."
This statement was interpreted by markets as Warsh striving to maintain distance from the White House. Johns Hopkins University economics professor Jon Faust, speaking before the hearing, stated, "If anyone was worried he would be a 'puppet,' those concerns should have been allayed after his first press conference following the Fed's decision to hold rates steady."
Despite the weak June CPI data, Warsh showed no signs of softening his hawkish stance. He told lawmakers, "Some might look at this morning's data and say, 'Oh, mission accomplished, everything is fine.' That is not my view." He reiterated that his current priority is guiding inflation back down to the 2% target. Warsh also pledged that the Fed would not "cherry-pick" data.
Regarding policy guidance, unlike some of his colleagues, Warsh did not submit an interest rate forecast at the Fed's June meeting and does not intend to do so in the future—because he opposes such "forward guidance." He clearly stated at the press conference that at his first meeting as Fed Chair, only one policy proposal was on the table, and a rate cut was not discussed.
However, market expectations appear more dovish than Warsh's stance. Following the CPI release and Warsh's testimony, traders have significantly withdrawn bets on a July rate hike. Market expectations for a July hike fell to around 12%, with expectations for a September hike also dropping to about 53%. Yet, Warsh showed no signs of an imminent rate cut. This divergence between market expectations and the Fed's stance is precisely a key source of future volatility for the gold market.
Outlook: Three Key Variables Will Determine Gold's Path
Variable One: Upcoming U.S. PPI Data. Investors will closely watch the U.S. Producer Price Index (PPI) data on Wednesday. If the PPI also shows easing inflationary pressures, it will further solidify market expectations for a Fed pause on rate hikes, supporting gold prices. Conversely, an unexpectedly high PPI could rekindle market concerns about inflation.
Variable Two: The Evolution of the U.S.-Iran Conflict. Geopolitics is currently the biggest uncertainty. U.S. President Trump has stated that strikes on Iran will continue "until I say 'enough'." He also indicated he would save strikes on Iranian energy facilities for last. Meanwhile, Iranian forces continue drone attacks on U.S. bases in the region. Whether this conflict escalates into a larger regional war or returns to the negotiating table at some critical point will directly impact global energy supply and inflation expectations, thereby determining gold's medium-term trajectory.
Variable Three: Warsh's Subsequent Remarks. Warsh will continue his testimony before the Senate Banking Committee on Wednesday. Markets will watch closely for any signals he might provide regarding the monetary policy path. Although Warsh has clearly stated he will not provide "forward guidance," any subtle changes in wording regarding inflation assessment or interest rate stance could trigger sharp market reactions.
Conclusion: Gold's 'Golden Era' is Not Over
Unexpectedly weak inflation data has provided monetary support for gold, while the escalating U.S.-Iran conflict provides geopolitical safe-haven premium. Driven by the dual forces of "cooling inflation" and "heating conflict," gold staged a remarkable battle around the $2,000 per ounce level. In the short term, gold prices will continue to fluctuate amidst the interplay of these three variables: inflation data, geopolitical developments, and Fed policy expectations.
From a broader perspective, gold's medium- to long-term fundamentals remain strong. The overarching trends of "de-globalization" and "de-dollarization" continue to favor gold's allocation and safe-haven value. A survey by the World Gold Council shows that 89% of surveyed central banks expect global central bank gold reserves to continue increasing over the next 12 months, with 45% planning to increase their holdings within that period—the highest proportion since the survey began in 2018.
Against a backdrop of persistent global inflation, elevated geopolitical risks, and robust central bank gold-buying demand, gold's role as the ultimate store of value is arguably more irreplaceable than ever. The $2,000 level may merely be another waypoint in gold's prolonged bull market.
Spot gold was last quoted at $2,053.93 per ounce.
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