Gold prices experienced a sharp sell-off on Wednesday, as escalating conflict in the Middle East intensified investor concerns that rising inflation would lead to persistently high interest rates.
The spot price of gold closed down $53.76, or 1.2%, at $4,434.30 per ounce.
Renewed hostilities in the Middle East, including an Iranian attack on Kuwait that damaged an airport and injured dozens, along with U.S. airstrikes near the Strait of Hormuz, contributed to the sell-off. Diplomatic efforts to halt the conflict appeared to be stalling.
An analyst noted that gold prices fell over 1%, marking a second consecutive daily decline, driven by market fears that hostilities between the U.S. and Iran could escalate, pushing up energy prices and the U.S. dollar.
A director of metals trading commented, "The intensifying U.S.-Iran tensions are the primary driver of volatility in the gold market. As the conflict worsens, rising energy prices are expected to fuel inflation expectations. This could lead to higher interest rates, further strengthening the dollar and adding additional downward pressure on gold."
While gold is traditionally viewed as a hedge against inflation, its appeal tends to diminish in a high-interest-rate environment because it does not yield any interest.
Oil prices rose, and the U.S. Dollar Index advanced for a third straight session. A stronger dollar makes dollar-priced metals more expensive for investors holding other currencies.
Geopolitical tensions weighed on gold, while the oil price shock stoked inflation worries. Following exchanges of fire between Iran and the U.S. near the Strait of Hormuz, the situation in the region remained highly tense. The U.S. Central Command conducted what it called defensive strikes against Iranian missile launchers and minelaying vessels. Meanwhile, Tehran targeted U.S. military bases in Gulf countries like Kuwait, the UAE, and Saudi Arabia.
Despite the U.S. President denying reports of a communication breakdown, the prospect of renewed negotiations seemed slim, contributing to higher oil prices. This raised concerns about potential oil supply disruptions, which could trigger a second wave of inflation and force major central banks to raise interest rates.
The U.S. crude benchmark, West Texas Intermediate, rose over 2.5%, supporting the dollar. The U.S. Dollar Index, which tracks the currency against a basket of six peers, gained 0.32% to 99.53.
The U.S. President issued a significant warning to Iran. In an exclusive interview, Israel's Prime Minister stated that Israel and the U.S. were prepared to take military action against Iran again if necessary. He added that Iran was playing with fire and should take this into account.
The U.S. President had previously warned Iran that the U.S. would fully resume military operations if the situation required it, further heightening market fears of a broader Middle East conflict.
Simultaneously, the fragile ceasefire arrangement between the U.S. and Iran was tested again. The U.S. Central Command stated that American forces intercepted several Iranian ballistic missiles and drones on Tuesday and conducted a defensive strike on a target on Iran's Qeshm Island in the Strait of Hormuz after Iran attempted to attack targets in the region.
While U.S. officials stated that Washington remained engaged on potential de-escalation, Iranian media had previously reported that communications had halted. The U.S. President later denied these reports on social media, calling them false and wrong.
Strong U.S. economic data may deter the Federal Reserve from cutting interest rates. U.S. employment data indicated a robust labor market, with ADP reporting an addition of 122,000 private jobs in May, exceeding the expected 117,000. Furthermore, Tuesday's JOLTS report showed an increase in job openings, suggesting resilience ahead of the upcoming nonfarm payrolls report, which is forecast to show an addition of 85,000 jobs.
The U.S. ISM Services PMI for May rose from 53.6 to 54.5, as businesses placed more orders in anticipation of price increases. The Prices Paid sub-index climbed from 70.7 to 71.3, indicating that the energy price shock is spreading to the services sector.
Meanwhile, the President of the New York Fed stated that he did not expect the inflation risks from the Middle East conflict to persist for long, that monetary policy was in a good place, and that he currently saw no need to either raise or cut rates.
Markets are focused on the U.S. nonfarm payrolls report for May, scheduled for release on Friday, for clues on the Federal Reserve's monetary policy path.
From a technical perspective, the analyst noted that gold prices extended their decline, touching a four-day low near $4,426 per ounce. The momentum has turned slightly bearish, with the price action forming lower highs and lows and closing near the 200-day Simple Moving Average, located around $4,422. A break below this level could pave the way for further losses.
The Relative Strength Index is in bearish territory and pointing lower, confirming that sellers are in control and pushing prices down.
The analyst stated that if the price breaks below the 200-day SMA, it could test the $4,400 level. Below that area lies the year-to-date low from March 23rd at $4,098.
The analyst added that on the upside, gold prices must first reclaim the $4,500 level to test the 20-day SMA near $4,573. Above that area is the 50-day SMA at $4,626, followed by the 100-day SMA at $4,794.
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