Gold prices continued to fall this week as escalating US-Iran tensions in the Gulf led to higher oil prices and consequently, increased expectations for Federal Reserve interest rate hikes. Spot gold was down $3.12 or $0.08%, settling at $4,120.67 on Friday, extending a weekly decline. Earlier in the week, it was near $4,100 an ounce after losing $1.4% in a previous session, and by Monday, it further slipped to $4,061.35 per ounce, down $0.7%. US gold futures for August delivery also decreased by $0.5% to $4,076.40, marking it for a fourth consecutive monthly loss of $10.4%.
The geopolitical risk, including Iranian forces hitting US military facilities and explosions near Iran’s nuclear infrastructure, typically would lead to a safe-haven bid for gold. However, this time, the market's primary reaction was to price in a more restrictive Federal Reserve. The bond market quickly repriced, with the 10-year Treasury yield rising over 2 basis points to $4.561% and the 2-year climbing over 4 basis points to $4.208%. The probability of a September rate hike by the Fed crossed $50% for the first time, reaching $51.2% by Friday's close, driving investors towards Treasuries and the dollar instead of gold.
The primary driver behind gold's decline was the surge in oil prices, fueled by the ongoing tensions in the Strait of Hormuz, where tanker traffic remains well below normal. WTI crude settled down $0.93% at $71.41 and Brent slipped $0.38% to $76.01, but both were still on pace for a strong weekly gain. The June Fed minutes revealed that several officials had pushed for another rate increase, confirming the hawkish stance of the Fed in response to rising crude oil prices and their inflationary impact. This environment of sustained high oil prices and the anticipation of further rate hikes makes gold, a non-yielding asset, less attractive to investors despite geopolitical risks.
Analysts note that gold could potentially reach the $5,000 level again this year, but this would depend on a de-escalation of hostilities, oil prices returning to pre-war levels to mitigate inflationary pressures, and a softer dollar. Investors are now closely watching upcoming US economic data, including June's ADP employment figures and the nonfarm payrolls report, for further indications of the Fed's monetary policy direction.
