- Trump said ceasefire talks could resume in Pakistan.
- US wholesale inflation figures increased by 0.5%, well below the forecast of 1.1%.
- Traders are pricing a 30% chance of a Fed rate cut this year.
Gold prices closed in the green on Tuesday as renewed hopes of ceasefire talks between Iran and the US weighed on the dollar. At the same time, prices found support amid an increase in Fed rate cut expectations.
Talks between the US and Iran and the subsequent ceasefire last week have propelled gold prices higher. However, brief hiccups like the strikes on Lebanon spooked investors. Moreover, talks between the two countries collapsed over the weekend, with Trump moving to block the Strait of Hormuz. The immediate reaction was a surge in the dollar amid safe-haven demand. Meanwhile, the dollar-denominated gold eased as it became expensive for foreign buyers.
However, the precious metal recovered on Tuesday after Trump said talks could resume in Pakistan. This rekindled hopes for an end to the war. Such an outcome would mean a decline in oil prices and easing inflation concerns.
On the other hand, a resurgence in the war would boost the dollar and hurt gold prices. If the war continues, oil prices will keep climbing, pushing global price pressures higher. This, in turn, would force central banks to hike interest rates. Gold performs poorly in high interest rate environments because it has no yield.
“Gold prices are reacting to the Middle East headlines in the short term, with hopes that the two countries will engage in talks. If things fall apart again, we can revert to the pre-ceasefire pattern of lower gold, a stronger dollar, and lower equity prices,” said Marex analyst Edward Meir.
Rates vs Gold (Source: Medium)
Elsewhere, market participants have been keeping an eye on Fed rate cut expectations. Data released on Friday indicated that consumer inflation increased by 3.3% annually, falling short of the projected 3.4%. The downbeat numbers supported gold as Fed rate hike expectations eased. Experts have been worried about oil-driven inflation and its impact on Fed policy. Notably, FOMC minutes released before the CPI revealed that some policymakers were open to higher interest rates. This would mean pushing back the timing for rate cuts.
On Tuesday, gold rose after US wholesale inflation figures showed a 0.5% increase, well below the forecast of 1.1%. As a result, traders were pricing a 30% chance of a Fed rate cut this year, up from 13%.
