Gold experienced a significant drop, with prices falling as much as 1.2% to below $4,070 an ounce on Monday and a 1.4% loss last week. London gold prices also fell 1.6% from Wednesday afternoon, setting a 3 pm benchmark beneath $4,000 for the first time since early November, fixing around $3,995 per ounce. This decline is largely attributed to renewed US-Iran strikes and threats, particularly concerning the Strait of Hormuz, which are fueling fears of oil supply disruptions and subsequent inflation. These geopolitical tensions have led to a surge in energy prices, with US WTI crude rising above $80 per barrel for the first time since mid-June.
The rise in oil prices is intensifying speculation that the US Federal Reserve (Fed) will raise interest rates later this year to combat inflation. Money markets are indicating a 57% chance of an October rate hike, despite a 73% expectation of rates holding steady at the July meeting. Comments from Fed Regional Bank Presidents Lorie Logan and Jeffrey Schmid, who expressed concern about persistent inflation and called for a 'modestly higher policy rate,' further support the hawkish outlook. This expectation of higher interest rates makes non-yielding assets like gold less attractive to investors, driving flows away from bullion.
The US dollar has also strengthened in response to these developments, with the US Dollar Index (DXY) up by 0.24% to 100.74. The dollar's appreciation is positively correlated with rising West Texas Intermediate (WTI) oil prices. The escalating conflict, including US airstrikes against Iran and Iran's threats to target regional energy supply routes, has created significant uncertainty and contributed to gold's downside. The overall sentiment among traders and analysts is that the path of least resistance for gold prices remains to the downside, with ANZ noting that gold could stay range-bound as long as Fed rate hike expectations persist.
