- Gold prices hit an all-time high on Friday due to Middle East tensions.
- Gold prices rose amid signs of a rebound in China’s economy.
- On Tuesday, Fed Chair Powell highlighted the need for restrictive policy.
Gold prices held steady on Tuesday as Middle East tensions overshadowed a surge in US Treasury yields. The growing tensions between Israel and Iran have increased safe-haven demand for the yellow metal. As a result, gold has rallied despite the recent drop in Fed rate cut expectations.
Gold prices (Source: Bloomberg)
Notably, gold prices hit an all-time high on Friday as investors worried over Iran’s looming attack on Israel. The anticipation of an escalation in the war had investors buying gold as a safer asset. However, the actual attack had little effect on the markets, as there was minor damage in Israel. Moreover, Iran had no plan to continue with the attacks.
Experts believe gold prices will rally again if the tension between Israel and Iran escalates. On the other hand, if there is calm, traders will return their focus to the Federal Reserve policy outlook.
Furthermore, gold prices rose amid signs of a rebound in China’s economy. The economy grew by a bigger-than-expected 5.3% in the first quarter. This was a big relief for gold traders worried about frail demand. Notably, China is the biggest consumer of gold. Therefore, expansion in the economy could translate to more demand for gold. At the same time, China’s central bank has been increasing its gold holdings, raising demand for bullion.
However, a shadow looms large over the recent gold rally. Data on Monday revealed a bigger-than-expected 0.7% increase in US retail sales. This was another sign that the economy was resilient and needed higher rates for longer. Since that report, traders have shifted their expectations for Fed rate cuts. Currently, markets expect the first rate cut in September. This is a significant pushback from the previous expectation of a cut in June.
Furthermore, policymakers have changed their tone and are now hesitant to signal rate cuts. On Tuesday, Fed Chair Powell highlighted the need for restrictive policy. His speech lacked the previous dovish incline, showing a loss in confidence that inflation will reach the 2% target. As a result, short-term Treasury yields soared.
At a different time, a yield surge would have weighed significantly on gold prices. However, with the ongoing geopolitical tensions, it has remained attractive to investors.
