- Gold has held steady since last week, when the US released a poor CPI report.
- By Monday, the US had attacked Iran for nine days without pausing.
- Traders are eagerly awaiting next week’s Fed meeting.
Gold prices rose by over 1% on Tuesday amid hopes for a ceasefire in the Middle East. The yellow metal has also remained strong as the dollar faced downward pressure after last week’s downbeat inflation report. Market participants are now looking forward to next week’s FOMC policy meeting.
Spot gold (Source: Bloomberg)
Gold has held steady since last week when the US released its CPI and PPI numbers. Consumer inflation was softer than expected at 3.5% in June. Gold traders cheered the data, which eased pressure on the Fed to hike interest rates. After the release, expectations of a rate hike fell, and gold jumped.
Geopolitical uncertainty has traditionally been bullish for gold, as it is considered a safe haven. At the same time, bullion is considered a good hedge against inflation. Both factors have been in play since the Iran war started. It has caused significant economic uncertainty, and the subsequent spike in oil prices has propelled inflation higher. Ideally, gold would shine with such fundamentals. However, when monetary policy is also involved, the opportunity cost of holding it increases.
The Fed has been under intense pressure to tame inflation. Experts were projecting at least two rate hikes this year. Expectations eased after the US and Iran signed a new ceasefire deal. Unfortunately, some of this progress has been undone in recent days as Middle East tensions have escalated. By Monday, the US had attacked Iran for nine days without pausing.
The uncertainty is back, and oil prices are again climbing. This means the Fed is back on high alert. Although last week’s CPI report favored gold, it did not capture these new developments. If inflation remains a problem, rate-hike expectations will rise, and gold will remain subdued. Traders are eagerly awaiting next week’s Fed meeting for more clues on the future.
“The psychologically significant $4,000 mark appears to be holding firm on the gold market… However, interest rate concerns in the US are likely to put the brakes on a stronger recovery,” Commerzbank said in a note.
Nevertheless, there is hope that the fighting will soon stop. Iranian officials this week said they were still in contact with the US through intermediaries, meaning talks could resume. The news strengthened gold on Tuesday. However, the future remains uncertain.