Gold prices steadied near $4,120 an ounce in early trading, recovering slightly after a three-day losing streak. This stabilization occurred as traders assessed the continued fighting in the Middle East and its implications for interest rates. Specifically, an exchange of airstrikes and the re-imposition of US oil sanctions on Iran have created uncertainty regarding the May truce and the safe passage of commodities through the Strait of Hormuz.
The ongoing geopolitical tensions, particularly the escalation between the United States and Iran, have led to a surge in crude oil prices. Brent crude increased by nearly 16% in the past week, reaching around $88 per barrel, while WTI climbed above $82. This rise in energy costs has reignited inflation concerns, prompting expectations that the Federal Reserve might keep interest rates higher for longer to combat stubborn inflation, which remains above the Fed's target.
Despite the typical safe-haven appeal of gold during geopolitical instability, the metal lost approximately 2.6% over the past week, trading around $4,011. This indicates a shift in investor focus from traditional safe-haven demand to the inflation risks generated by soaring oil prices. Higher interest rates make non-yielding assets like gold less attractive, and a stronger US dollar increases its cost for international buyers. Futures markets ended the week pricing in about a 58% probability of another Fed rate hike by September, further pressuring gold. Meanwhile, gold-backed ETFs experienced significant outflows, with about $8.9 billion in net outflows in June, primarily from North American investors, contrasting with continued gold buying by central banks like China.
