On May 21, ATFX reported that former President Trump stated negotiations with Iran had entered the final stage. Market sentiment collectively improved on Wednesday, with the US dollar and US Treasury yields retreating. This pushed up the price of gold, which is denominated in US dollars and pays no interest, with gold rebounding over 1% for its best performance since May 6.
Trump stated that US-Iran negotiations had entered the "final stage," while Iran's establishment of a controlled navigation zone in the Strait of Hormuz, requiring vessel permits for passage, was seen as a substantive step toward de-escalation. The potential end of conflict and reopening of the Strait of Hormuz would alleviate inflation concerns stemming from high energy prices, thereby reducing market expectations for global central banks to "maintain high interest rates for an extended period." As gold is a non-yielding asset, a low-interest-rate environment is most favorable for it, so this shift in expectations directly drove the gold price rebound.
Against the backdrop of overall improvement in risk sentiment, the US dollar index weakened, and US Treasury yields retreated slightly from the high of 5.2%. Together, these factors pushed up the price of gold, which is denominated in US dollars and pays no interest. This represents a typical revaluation of commodity pricing triggered by a cooling of safe-haven sentiment and a resurgence in risk appetite.
However, while the US-Iran situation appears to have positive developments, the prospects for Federal Reserve interest rate hikes are also strengthening, implying constraints on gold's rebound. The latest released minutes from the Federal Reserve's policy meeting showed that most officials warned that if inflation persists above target levels, the US central bank may need to consider raising interest rates. This hawkish stance aligns with current market expectations for rate hikes—interest rate swap markets indicate over an 80% probability of a hike by the end of 2026, and the CME FedWatch Tool shows the probability of a 25-basis-point hike in December has risen above 50%. If expectations for rate hikes continue to heat up, increasing the opportunity cost of holding gold, then capital may flow out of gold, putting downward pressure on its price.
ATFX's view points out that Wednesday's rebound in gold was largely "expectation trading," with the market pricing in the achievement of a peace agreement in advance. The gold price moved away from recent lows but has not yet broken out of the recent range. Whether it can continue to rise next depends on further clarity in US-Iran negotiation news. It is important to note that both sides have previously been in a state of frequent changes in stance, and the market continues to watch the situation's development with cautious optimism.
Against the current backdrop of the Federal Reserve's unchanged hawkish stance and persistently heating expectations for rate hikes, gold remains in a state of limited upside. Kevin Warsh is set to be officially sworn in as Federal Reserve Chairman tomorrow. His first public statement after taking office will be crucial. If he confirms a hawkish leaning and emphasizes that inflation risks have not been resolved, the gold price may further test previous lows. If his stance is relatively moderate, gold may see a phase of stabilization and rebound.
External judgment suggests Warsh may be the most willing and theoretically prepared Federal Reserve Chairman in nearly two decades to challenge an accommodative monetary environment. Warsh has long criticized the Fed for being overly data-dependent and refusing to cut rates, tending to bet that productivity gains from artificial intelligence will curb inflation, creating conditions for rate cuts. Additionally, he advocates for significantly reducing the Fed's bloated balance sheet, returning the dominant role in money creation from the government to the market.
If Warsh adopts a hawkish stance, continuing to push US Treasury yields higher, the opportunity cost of holding gold increases significantly. Investors would then be more inclined to sell gold and buy Treasuries, which is the core logic behind gold's recent pressure. Warsh's emphasis on balance sheet reduction and rebuilding monetary discipline would, in the short term, push the US dollar exchange rate higher. A stronger US dollar means dollar-denominated gold becomes more expensive for investors holding other currencies, further suppressing gold demand. Therefore, if Warsh successfully rebuilds monetary discipline, this poses a potential challenge to gold's long-term logic. Overall, the market consensus on gold's trajectory after Warsh takes office is: clear short-term pressure, medium-to-long-term support exists, but uncertainty has increased significantly. However, as long as Warsh's balance sheet reduction remains at the signaling level and cannot be truly implemented, gold's long-term logic will not be fundamentally shaken.
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