Gold prices are currently hovering around $4,000 per ounce, having experienced a significant 14% loss in the second quarter, marking its worst performance since 2013. The precious metal is under pressure due to rising tensions between the United States and Iran, which have propelled oil prices higher and intensified fears of inflation. This situation has led to increased speculation that the US Federal Reserve will raise interest rates.
Current market probabilities suggest a 61.4% chance of a September rate hike by the US Federal Reserve, according to the CME FedWatch Tool. This is a noticeable increase, with some reports indicating as high as an 83% chance for a December hike, up from 73% last week. Cleveland Fed President Beth Hammack is among a growing number of policymakers advocating for higher interest rates to combat persistent inflation, a stance that could lead to a contentious debate at upcoming Fed meetings.
The escalating conflict in the Middle East is having a direct impact on energy markets, with Brent crude oil prices stabilizing after reaching a one-month high. This surge in oil prices, up approximately 30% from their July lows, reinforces inflation fears and consequently strengthens expectations for a "higher-for-longer" interest rate environment. Gold, being a non-yielding asset, typically loses its appeal to investors when interest rates rise, as more attractive returns can be found in interest-bearing assets like government bonds. The US dollar's strength further contributes to gold's decline by making it more expensive for international buyers.
Despite recent signs of cooling US consumer and producer inflation, the market remains focused on the implications of rising oil prices. Iran has reportedly abandoned its ceasefire with the US, and ongoing airstrikes and military actions in the region, including Iranian attacks on US military assets and Houthi threats against Saudi Arabia, suggest a prolonged conflict. This geopolitical instability, by pushing energy costs higher, reinforces expectations of more aggressive monetary policy from the Fed, thereby exerting downward pressure on gold prices.
While gold-backed exchange-traded funds experienced significant outflows in June, central banks continued their gold acquisition spree, extending their buying streak to 20 consecutive months. In May, central banks purchased a net 41 tonnes, indicating a long-term strategic demand for gold as a reserve asset, which provides a floor for prices. However, for gold to regain significant upward momentum, a return of sustained ETF inflows would likely be necessary.
