- Tensions between the US and Iran have eased, giving room for talks.
- The rally in oil has caused panic about global price pressures.
- Traders are currently placing a 77% chance of a September Fed hike.
Gold collapsed on Tuesday as the surge in oil prices and subsequent inflation worries boosted Fed rate hike expectations. At the same time, the stronger dollar made gold more expensive for foreign buyers. Meanwhile, market participants are looking forward to the FOMC policy meeting for more clues on the path of monetary policy.
The yellow metal started the week in the red despite easing tensions between the US and Iran. The two nations are currently negotiating, and Trump said the talks were good. Still, the bearish sentiment has remained from last week when the US was attacking Iran without pause. The conflict, which escalated to include the Houthis and Saudi Arabia, sent oil prices higher.
Spot gold (Source: Bloomberg)
The rally in oil caused panic about global price pressures. The uncertainty witnessed at the height of the war was back, and safe haven assets were benefitting. Gold is seen as a safe haven in times of geopolitical uncertainty. Additionally, it is considered a good hedge against inflation. However, for investors looking for big returns, yielding assets become more attractive when monetary policy tightens.
The Middle East tensions have put pressure on the Fed to increase borrowing costs. As a result, rate hike expectations have increased since the conflict began. Traders are currently placing a 77% chance that the central bank will hike interest rates in September. Furthermore, there is a 31% chance of a hike later today.
As rate hike bets increase, the dollar strengthens. Therefore, gold, which is denominated in dollars, becomes more expensive for overseas traders; thus, demand eases.
“Elevated energy prices remain an inflationary concern for Fed members, and the expected hawkish tilt by the Fed has forced interest rate hike expectations and the US dollar higher, applying pressure on the gold market,” said David Meger, director of metals trading at High Ridge Futures.
The Fed will meet on Wednesday, and policymakers will likely maintain their hawkish tone. However, traders believe they will keep interest rates unchanged. A surprise hike would send gold prices lower.
The US will also release its core PCE report later this week. This is the Fed’s preferred measure for inflation. Recent CPI and PPI figures briefly supported gold but failed to capture the latest fundamentals. A hotter-than-expected number would increase rate hike expectations and further strengthen the dollar. On the other hand, bullion would remain subdued.
