Gold edges lower to near $4,000 as US-Iran tensions fuel inflation worries
- Gold price edges lower to around $4,000 in Tuesday’s early Asian session.
- US forces struck Iranian targets after Trump vowed Tehran “will pay” for killing three US soldiers.
- Traders see low chance of a hike at the Fed’s July meeting but have fully priced in at least one increase by year-end.
Gold price (XAU/USD) declines to near $4,000 during the early Asian session on Tuesday. The precious metal extends its downside as escalating tensions between the United States (US) and Iran pushed oil prices up, intensifying inflation concerns.
Bloomberg reported on Monday that US forces struck Iranian targets after US President Donald Trump vowed Tehran “will pay” for killing three US soldiers. US Central Command (CENTCOM) said that the US military began a new wave of strikes on Monday, the 10th straight day of attacks. “Every time Iran kills an American soldier, they will pay for that killing many times over!” said Trump.
Concerns about an escalation in Middle East hostilities could push crude oil prices up and could prompt central banks to hold rates at elevated levels for longer, weighing on gold's appeal as a non-yielding asset.
“Gold remains negatively correlated to oil prices, with market participants closely tracking developments in the Middle East,” UBS analyst Giovanni Staunovo said.
Traders continue to assess the likelihood of the US Federal Reserve (Fed) hiking interest rates to contain inflation. Swap traders see low odds of the Fed raising rates at its next meeting in July after softer US inflation data, although traders have fully priced in at least one hike by the end of the year.
Cleveland Fed President Beth Hammack on Friday joined a growing chorus of officials voicing concern over inflation, saying that interest rates may need to rise to beat back persistent inflation.
Hammack flags broad-based inflation pressures, reinforcing hawkish Fed tone
Fed’s Hammack delivers a more hawkish message relative to the historical average, with the FXS Speechtracker score rising to 7.2/10 versus a 6.6/10 baseline. The emphasis on businesses calling for action to curb inflation and consumers facing a “growing sense of despair,” alongside broad-based price pressures from energy, supply chains, insurance, and AI data centers, underscores a clear focus on persistent inflation risks even as growth and consumer spending remain solid. The repeated characterization of “persistently high inflation” as the bigger concern signals a bias toward tighter policy or at least a higher-for-longer stance for the Dollar.
The FXS Fed Sentiment Index climbed by 2.06 points to 128.64, reinforcing a firmly hawkish setting well above the neutral 100 mark. This move, aligned with the stronger FXS Speechtracker reading, suggests markets should lean toward expecting sustained restrictive policy, a supportive backdrop for the Dollar against the Euro and Yen.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
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