- US strikes on Iran on Tuesday dashed hopes for a peace deal.
- Inflation concerns have turned more Fed policymakers hawkish.
- Kevin Warsh was sworn in as the new Fed chief on Friday.
Gold lost 1% of its value on Tuesday as market participants increasingly bet on a 25 basis point Fed rate hike this year. These bets increased after US military strikes in Iran. As a result, oil prices gained and inflation worries flared.
Spot gold (Source: Bloomberg)
Gold has dropped since the war began due to inflation concerns. Last week, it mainly traded sideways, consolidating amid hopes for an end to the Iran war. Traders were particularly optimistic on Wednesday last week after Trump said talks with Iran were at the final stages. Moreover, the US had paused strikes on Iran to give time for negotiations.
Since then, Trump has made several remarks that have bolstered hopes for a peace deal to end the war. On Monday, the US president said talks were proceeding nicely. The likelihood of a peace deal is bearish for oil as it would mean a reopening of the Strait of Hormuz. In such a case, oil supply would return to normal, loosening the currently tight market.
A decline in oil prices would ease inflation concerns and lower bets for higher borrowing costs. Consequently, the opportunity cost of holding gold would drop.
However, US strikes on Iran on Tuesday dashed hopes for a peace deal and increased uncertainty about the future. According to reports, the US military was conducting self-defence strikes. The news led to a surge in oil prices as it became likely that the Strait of Hormuz would remain closed for longer. At the same time, rate hike expectations increased, weighing on the non-yielding gold.
The recently released FOMC minutes revealed that inflation concerns have turned more policymakers hawkish. As a result, traders are pricing a quarter-point hike late this year.
“The bond markets are thinking that the next rate move by the Federal Reserve is going to be an increase. That’s a negative for the gold market here today,” said Jim Wyckoff, market analyst at American Gold Exchange.
Elsewhere, Kevin Warsh was sworn in as the new Fed chief on Friday. A new head could mean a slightly different approach to monetary policy. Traders will now watch the US core PCE price index report, a better measure of inflation. An upbeat number would boost rate hike bets and push gold lower. The opposite is also true.
