Gold experienced significant volatility, initially falling over 1% to $4,070 an ounce on Monday, after renewed US-Iran hostilities over the weekend drove up energy prices. This geopolitical unrest, centered around the vital Strait of Hormuz, fueled concerns about inflation and increased the likelihood of further interest rate hikes by the Federal Reserve. By Monday's close, gold had dropped to $3,992.20, losing 3.09%, and briefly slipped below $4,000 an ounce for the first time in three weeks. However, it rebounded on Tuesday as investors sought bargains and awaited key economic data.
Hawkish comments from Federal Reserve Governor Christopher Waller further weighed on gold, indicating that policymakers might need to raise interest rates soon if underlying inflation persists. Traders are now pricing in a 43% probability of a rate hike at the Fed’s July 28-29 meeting, and a 72% chance of a September hike, according to the CME FedWatch Tool. Higher interest rates typically diminish the appeal of non-yielding assets like gold.
The surge in oil prices, with Brent crude gaining over 5%, was a major factor contributing to gold's decline. The US denied Iran's claim of closing the Strait of Hormuz "until further notice," but American forces initiated strikes to ensure freedom of navigation. This geopolitical risk, combined with rising energy costs, reinforces expectations of elevated inflation and a stricter monetary policy.
Gold's usual role as a safe-haven asset during conflict was largely overridden by concerns that the Middle East escalation would drive inflation higher, leading to increased interest rates and a stronger dollar. This dynamic, dubbed a "rate play" for gold, means that as interest rate expectations rise, bullion loses its allure. Analysts like Fawad Razaqzada from Forex.com suggest gold could further decline towards $3,800 or even $3,500 if the current market conditions persist.
