Gold prices declined on Monday as renewed tensions in the Middle East, specifically between the US and Iran, fueled inflation concerns. This apprehension reinforced the expectation that central banks might maintain tighter monetary policies for a longer duration. Spot gold experienced a 0.4% decrease, trading at $4,517.37 per ounce, after reaching a two-week high on Friday. US gold futures also saw a significant drop, falling 1.9% to settle at $4,506.30.
The conflict intensified after Iran reportedly attacked a US air base following earlier US strikes on Iranian military targets. Iran's negotiating team also stated they would cease exchanging messages with the United States through mediators. This geopolitical instability caused oil prices to rise, adding to inflation fears. Such inflationary pressures could prompt central banks to raise interest rates to curb rising prices. Traders are currently pricing in a roughly 56% chance of at least one US rate hike by the year-end, according to CME Group’s FedWatch tool.
While gold is often perceived as a hedge against inflation, its appeal diminishes in a high-interest-rate environment because it does not provide a yield. The firming of the US dollar also made metals priced in the currency more expensive for international buyers. Jim Wyckoff, a market analyst at American Gold Exchange, commented that "Expectations for interest rates to remain higher for longer are likely to keep gold under pressure, unless bond yields stop rising and rates begin to stabilise or trend lower."
Market participants are now focusing on upcoming US jobs data releases and speeches from Federal Reserve officials for further cues. Ole Hansen, an analyst at Saxo Bank, suggested that once the geopolitical situation stabilizes and energy shocks subside, investors would likely return their focus to the structural themes that have propelled gold's bull market in recent years. Citigroup Inc. recently lowered its three-month target for gold to $4,000 an ounce from $4,300, citing the likelihood of a Fed rate hike this year, though it maintained its six- to twelve-month price target at $5,000 an ounce. Ryan McKay, senior commodity strategist at TD Securities, noted that "The prevailing inflation fears, data strength, Fed hike probability increasing and break of 200-day moving average have led to a heavy skew negative."
