Gold: Fed caution and strong Dollar cap upside – Commerzbank

Commerzbank’s Commodity Analyst Carsten Fritsch notes that Gold has fallen about 5% since the Iran war began, struggling to act as a safe haven as a stronger Dollar and repriced Fed expectations weigh. ETF outflows have reversed earlier inflows, and he argues that a cautious FOMC is unlikely to provide fresh impetus for Gold unless rate-cut prospects are clearly kept open.

Safe-haven role challenged by Fed repricing

"The gold price is struggling to fulfil its role as a safe haven in times of crisis. It is currently trading at just over USD 5,000 per troy ounce. Since the start of the war in Iran two and a half weeks ago, the gold price has thus fallen by around 5%. The US dollar, which has risen significantly in value since the start of the war, has provided headwinds for the gold price. "

"However, there have also been periods in the recent past where the gold price has been able to defy a stronger US dollar. This is not the case this time due to the correction in expectations regarding Fed interest rate cuts. By the end of last week, Fed Funds futures were no longer pricing in even a 25-basis-point rate cut by the end of the year."

"This means that almost 50 basis points of expected rate cuts have been priced out of the market since the start of the war. This is primarily due to the sharp rise in oil prices and the resulting inflationary risks. Rising interest rates, or fewer rate cuts, increase the opportunity cost of holding gold."

"If the door remains open for interest rate cuts, the gold price could rise again. However, the considerable uncertainty surrounding the duration of the war and the disruption to oil supplies is likely to make the Fed cautious about making too clear a statement on the future interest rate path. The FOMC meeting is therefore unlikely to provide any new impetus for the gold price."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)