Gold falls toward $4,000 as US-Iran hostilities boosts Fed rate hike bets
- Gold price slumps to near $4,000 in Monday’s early Asian session.
- Oil-driven inflation concerns have strengthened expectations that the Fed may continue to tighten monetary policy.
- The US and Iran ramped up attacks over the weekend.
Gold price (XAU/USD) falls to around $4,000 during the early Asian trading hours on Monday. The precious metal hovers around the psychological level in recent weeks after losing 14% in the second quarter (Q2), its worst showing since 2013. Rising tensions between the United States (US) and Iran push oil prices up, intensifying inflation fears.
Although US consumer and producer inflation showed signs of cooling, the market remains under pressure from rising oil prices and expectations that interest rates will remain higher for longer. This, in turn, weighs on gold's appeal as a non-yielding asset.
Traders are now pricing in nearly a 61.4% chance that the US Federal Reserve (Fed) will hike rates in September, according to the CME FedWatch Tool.
The US has launched the ninth night of Iran strikes, with Washington saying that airstrikes on Sunday aimed to "punish" Iran over the first US military deaths since renewed hostilities with the Islamic Republic, per Bloomberg.
Iranian officials said the ceasefire between Washington and Tehran has been effectively abandoned, raising the possibility of deepening disruptions to crucial energy flows through the narrow waterway.
Air raid sirens sounded across Bahrain after Iran carried out a fresh wave of ballistic missiles and one-way attack drones targeting sites in Bahrain, Jordan, Kuwait and Iraq. Signs of a prolonged conflict in the Middle East could exert some selling pressure on the yellow metal in the near term.
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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