- Higher inflation has prompted several major central banks to raise interest rates.
- Trump said he was ready to resume talks with Iran at the UN.
- Analysts believe the long-term outlook for gold is bullish.
Gold prices were down on Wednesday for the third consecutive session as the outlook for higher global interest rates weighed on the non-yielding metal. At the same time, a rally in the dollar has made bullion more expensive for overseas buyers. Prices have declined despite a drop in oil prices as traders hope for a peace deal at the UN meeting.
Tensions in the Middle East have escalated in recent weeks, causing worries about oil supply. Moreover, rising energy prices have heightened inflationary pressures worldwide, putting central banks on high alert.
Higher inflation has prompted several major central banks, such as the Fed, ECB, and BoJ, to hike interest rates. Furthermore, policymakers remain concerned about higher inflation, meaning the outlook for most of these banks is hawkish.
As borrowing costs increase, the opportunity cost of holding gold goes up. Traders switch to yielding assets, sending gold prices lower. However, reports this week showed that Trump was ready to resume talks with Iran at the UN. Therefore, there is hope that diplomacy will lead to a lasting peace deal, and this has sent oil prices lower.
However, if history is anything to go by, these hopes could be dashed as they have been before. Already, Trump has said the US will annihilate Iran if there is no peace deal. Such talk shows the US president still believes they have the upper hand, and this could make it difficult for the two to agree.
China gold imports (Source: Bloomberg)
Still, analysts believe the long-term outlook for gold is bullish. For instance, investors in China bought more gold in August. Geopolitical risk will keep demand for the safe-haven metal high. At the same time, central bank purchases continue to support prices.
“Short-term volatility in gold very much depends on how oil trades and the developments that happen in the Middle East. However, long-term structural drivers for gold are still really strong,” said Kyle Rodda, senior financial market analyst at Capital.com.
With no key economic releases from the US this week, focus will remain on talks at the UN and developments in the Middle East. Traders are now looking forward to next week’s monthly employment report, which will paint a picture of the state of the US economy amid the war in Iran.