Gold slumps to near $4,050 as Middle East conflict fuels inflation worries

Gold price tumbles to near $4,050 in Friday’s early Asian session.
Heightened military tensions in the Middle East reignite inflation fears, weighing on the Gold price.
The market is now anticipating a 35.8% chance of a Fed rate hike in July.

Lallalit Srijandorn FXStreet

Gold price (XAU/USD) faces some selling pressure to around $4,050 during the early Asian session on Friday. The precious metal retreats from a two-month high as rising tensions in the Middle East war lift oil prices, hardening bets that the US Federal Reserve (Fed) will resume raising interest rates as soon as next week.

Yemen’s Tehran-backed Houthi militant group said its forces attacked two Saudi oil tankers in the Red Sea that had "violated" its blockade of Saudi ports, as the US carried out a 13th consecutive night of strikes on Iran. This development has fueled concerns about wider conflict in the Middle East.

Additionally, US President Donald Trump warned the Houthis on Thursday that if they did so again, the US would inflict "major military punishment" upon both them and Iran. Trump further stated that he’s “considering a massive attack” on Iran, per Axios. He told the news outlet that it would be “bigger than ever before,” before adding, “I am close to making a decision. We are all set for it.”

A crude oil-led inflation scare amid the Iran war boosts Fed rate hike bets, which could undermine the non-yielding asset such as the yellow metal in the near term. Money markets are now pricing in nearly a 35.8% chance of a rate hike from the Fed this month, as well as an 82.1% probability of at least a quarter-point hike in September, per CME’s FedWatch tool.

Gold upside seen constrained as Fed hike risks build

According to TD Securities, the broader macro backdrop remains unsupportive for a sustained build-up in bullish positioning, with analysts arguing that "there are no fundamental reasons to think that the US rate and FX environment will be conducive to increasing long gold exposure any time soon." They caution that geopolitical developments are compounding this challenge, noting that "it is likely that the Middle East war-driven oil price increases will continue to increase the probability of a Fed rate hike," a dynamic that, in their view, further undermines the case for materially higher gold allocations in the near term.

Gold FAQs

Why do people invest in Gold?

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.

Who buys the most Gold?

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.

How is Gold correlated with other assets?

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.

What does the price of Gold depend on?

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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