- Bullion has rallied since the start of August amid a decline in the dollar.
- Recent economic data has revealed a slowdown in the US economy.
- Iran said the Strait of Hormuz would remain closed until the US accepts its conditions.
Gold prices fell on Tuesday as yields gained amid rising tensions in the Middle East. Progress towards a deal has stalled, with Iran saying the Strait of Hormuz will remain closed. As a result, oil prices rose, rekindling inflation worries and increasing chances of a Fed rate hike in September.
Gold (Source: Bloomberg)
Bullion has rallied since the start of August amid a decline in the dollar and hopes for peace in the Middle East. The dollar started losing its shine as demand for safe-haven assets dropped. The US and Iran paused their conflict, giving room for diplomacy. Talks resumed, and there was hope for a reopening of the Strait of Hormuz. Additionally, traders were expecting a new ceasefire deal that would give room for talks.
A weaker dollar makes gold cheaper for foreign buyers, sending prices higher. The dollar also fell as the US economy began to show signs of a slowdown. Recent economic data has revealed weaker growth in the second quarter, weak job growth, and dismal sales in July.
The economy slowdown means the Fed has little room to raise interest rates. High borrowing costs increase the opportunity cost of holding the yellow metal. The opposite is therefore bullish for gold.
Meanwhile, the hope for peace in the Middle East sent oil prices lower, easing inflation worries. It also dampened expectations for a Fed rate hike, reducing the likelihood of one in September. However, progress on talks in the Middle East has stalled. This week, Iran said the Strait of Hormuz would remain closed until the US accepts its conditions. Meanwhile, Trump said he would not extend the ceasefire deal with Iran. This sent oil higher, boosting yields as traders increased bets on a Fed rate hike. Meanwhile, gold posted a bearish close as rate-hike bets increased.
“The steepening of the yield curve poses a headwind for gold, while firmer oil prices are also a factor behind today’s weakness,” said Peter Grant, vice president and senior metals strategist at Zaner Metals.
“Despite the current pullback, we remain bullish on gold and see further upside potential, though the market may need to work through a period of consolidation before renewed buying interest emerges,” Grant said.
Traders will now watch the FOMC meeting minutes for more clues on Fed rate hikes.
