- Trump did not make a final decision on a ceasefire extension last week.
- News outlets reported an escalation of tensions in Iran on Wednesday.
- Traders are eagerly anticipating the US nonfarm payrolls.
Gold resumed its decline as tensions between the US and Iran escalated on Wednesday. There was a brief rebound on Tuesday after Trump said peace talks with Iran were continuing. On Monday, Iran announced the end of all negotiations with the US due to ceasefire violations in Lebanon.
Spot gold (Source: Bloomberg)
Gold has suffered since mid-May as stalled talks between the US and Iran left traders uncertain about the future. At the same time, the continued closure of the Strait of Hormuz meant that oil prices kept climbing. As a result, inflation worries and bets for Fed rate hikes rose. The opportunity cost of holding gold increases with higher interest rates. Consequently, the price fell.
However, there was a shift in sentiment toward the end of the month as talks resumed. Top officials in the US and Iran were optimistic about a likely deal. On Friday last week, they announced plans to extend their ceasefire by 60 days. In this time, Iran would lift traffic restrictions in the Strait of Hormuz. The development lifted gold prices as traders hoped for a looming end to the war.
However, reports late Friday revealed that Trump did not make a final decision agreeing to this ceasefire extension. Furthermore, strikes between the US and Iran resumed in the following days.
On Monday, Iran’s officials said they were stopping all talks with the US. Furthermore, they threatened to completely close the Strait of Hormuz. They cited ceasefire violations with Israel attacking Lebanon. Trump responded that he did not care if the talks ended. According to him, they had gone on for too long with no solid deal.
The renewed tensions dashed hopes for peace and rekindled inflation worries as oil soared. As a result, gold prices dropped. Things changed again on Tuesday when Trump said talks were continuing. Reports also revealed that Iran was reviewing a proposal from the US for peace. Gold recovered only briefly as market confidence in progress fell.
By Wednesday, news outlets were reporting an escalation of tensions in Iran, which is weighing on gold prices.
Elsewhere, traders are eagerly anticipating the US nonfarm payrolls report this week, which will show the state of the US labor market. This will shape the outlook for monetary policy.
