Gold recovery to $5,000 depends on Trump’s next move in Iran

Spot Gold grinds higher for a fourth consecutive day on Wednesday, as optimism weighs on US Dollar (USD) demand. The advance, however, is solely backed by United States (US) President Donald Trump’s words.

The risk-averse environment triggered by President Trump’s decision to hit Iran had a negative impact on the precious metal, which temporarily lost its safe-haven status to the USD.

The mood has been souring as higher Oil prices, a direct consequence of the war, pushed inflation concerns to the extreme of forcing major central banks to adopt a hawkish tone.

War updates

The sentiment changed on Wednesday, as President Trump stated that the US may leave Iran in “two or three weeks,” hinting at a soon end to the Middle East war. He also repeated that Iran “is losing” and that a complete victory is not necessary to end the job, which was destroying Tehran's nuclear program. Those lines were enough to boost the market’s sentiment, despite some other words that were not that encouraging.

Trump said negotiations continue, despite Iranian authorities denying it. Finally, he also said the US may leave NATO amid a lack of support from partner countries, while adding that reopening the Strait of Hormuz is not the US's problem, but the problem of those economies that depend on Middle East Oil.

Meanwhile, land troops arrive in the Middle East, and there are market talks about potential ground assaults on Thursday: one on Kharg Island, Iran’s major oil hub, which handles roughly 90% of Iran’s oil exports, and another one meant to seize enriched uranium to destroy Iran’s nuclear power.

Finally and more relevantly, US President Trump announced it would address the nation on Wednesday to provide an update on the Iran war situation.

Confusing and sometimes contradictory headlines fell short of affecting the market’s mood, still upbeat. Encouraging US macroeconomic data further fueled the positive sentiment and maintained the Greenback on the back foot.

Gold recovers, why?

Gold is up because financial markets are not about safe-haven demand, but fears about the USD stability. The war seems out of Trump’s hands, as it has already extended beyond his initial plans. Higher oil prices and inflation are running counter to its desire for lower interest rates. Trump has failed to consider the consequences of his actions in the Middle East, and risks his political strength ahead of the midterm elections. Not to mention, the costs of the war far exceed whatever budget the nation has.

How far Gold can extend its recovery depends on what the White House does next. If the land attacks develop as suggested, markets may enter panic. Stocks may fall and, for a change, Gold return to the $5,000 mark in the upcoming sessions, as market participants are pricing in that the damage is done in the US economy and foresee a few months of turmoil in the country.

The precious metal may fall only if attacks de-escalate instead of escalating, and the war ends before the two to three weeks anticipated by Trump. An extension beyond such a term, however, could result in Gold retesting record highs around $5,600.