Gold prices are exhibiting volatility around the key $4,000 per ounce level, driven by a complex interplay of geopolitical risks and Federal Reserve monetary policy expectations. Spot gold was trading at $4,018.90 per ounce, while U.S. gold futures for August delivery saw a slight gain of 0.1% to reach $4,023.10. At one point, XAU/USD rose 0.4% to $4,024.72 an ounce, and Gold Futures increased by 0.5% to $4,029.87. However, spot gold later dipped 0.1% to $4,011.96, and U.S. gold futures for August delivery mirrored this, losing 0.1% to $4,015.80.
The primary driver of gold's recent movements is the escalating conflict in the Middle East, particularly involving the U.S. and Iran. Renewed hostilities have led to oil prices jumping over 3%, with Brent crude moving back above $90 a barrel. This surge in energy costs is stoking inflation fears, which, in turn, influences the outlook for U.S. interest rates. Gold typically serves as an inflation hedge, but higher interest rates diminish the appeal of the non-yielding asset, creating a challenging backdrop for bullion, as highlighted by Afdhal Rahman, Executive Director, Wealth Advisory at OCBC.
Investors are closely monitoring the Federal Reserve's stance on interest rates. The market currently perceives an 82% to 83% chance of a U.S. interest rate hike in December, an increase from 73% last week, according to the CME FedWatch tool. Cleveland Fed President Beth Hammack, among other policymakers, has voiced concerns that interest rates may need to rise to combat persistent inflation. While the Fed is widely expected to keep rates unchanged at its upcoming meeting, policymakers' guidance on inflation will be crucial. This hawkish repricing of interest-rate expectations, combined with a stronger U.S. dollar, is exerting pressure on gold, even though sustained central bank buying provides longer-term support.
Despite the broader pressures, the $4,000 level has proven to be a significant support for gold. The metal has traded in a relatively narrow range around this mark after experiencing a 14% tumble in the second quarter, its weakest performance since 2013. Brian Lan, Managing Director at GoldSilver Central, noted that "$4,000 has been an important level, and shows that there is support for the metal when it falls below that mark." However, Kelvin Wong, Senior Market Analyst at OANDA, warned that a sustained break below $3,886 could lead to further weakness towards $3,500. Silver has shown more resilience, with spot silver gaining 1.7% to $56.87 per ounce.
