Gold Falls as Oil and Bond Yields Rise Amid Dwindling Hopes for Peace Between the U.S. and Iran
Gold prices fell on Tuesday after posting strong gains during the previous two sessions, affected by rising oil prices and higher U.S. Treasury yields, as hopes for a lasting peace agreement between the U.S. and Iran dimmed and tensions in the Middle East persisted.
The price of gold fell by more than 0.5% to around $4,390 per ounce, amid corrections and profit-taking following recent gains, while the precious metal also faced pressure from a range of traditional economic factors.
Rising Oil Prices Weigh on Gold
Gold’s decline coincided with oil prices continuing to rise to their highest levels in more than two weeks, amid fears that the geopolitical crisis in the Middle East will persist for a longer period.
Rising energy prices are raising concerns about a resurgence of inflationary pressures, as higher oil and fuel costs could lead to higher prices for goods and services, which may prompt central banks to keep interest rates high for a longer period.
These developments are weighing on gold, which does not generate a yield, as high-yielding assets such as U.S. Treasuries become more attractive to investors when interest rate expectations rise.
U.S. Treasury Yields Rise
The rise in oil prices coincided with an acceleration in the sell-off of U.S. Treasuries, pushing yields to higher levels.
The yield on 30-year U.S. Treasury bonds rose to its highest level in nearly two decades, signaling a shift in investors expectations regarding inflation and the path of U.S. interest rates.
Rising bond yields are a major factor weighing on gold prices, as higher yields on fixed-income assets increase the opportunity cost of holding the precious metal.
Dwindling Hopes for Peace Between the U.S. and Iran
Gold’s movements come amid dwindling hopes for a deal that would permanently end the war between the U.S. and Iran.
Iran announced that it would shift to a more comprehensive military posture following the collapse of talks aimed at ending the war, while Washington ruled out extending the temporary ceasefire, fueling fears of continued geopolitical tensions in the region.
The ongoing crisis could heighten concerns about energy supplies, thereby pushing oil prices even higher a development that could fuel inflation expectations and influence the Federal Reserve’s decisions on interest rates.
Inflation and Interest Rates Drive Gold Prices
Expectations regarding U.S. interest rates directly influence gold prices, especially since gold does not pay interest, consequently, it becomes more attractive when interest rates and yields decline, and vice versa.
Gold recently hit its highest level since June 5, after markets repriced their expectations regarding U.S. monetary policy and the upcoming September meeting.
Market movements suggest that the probability of a rate hike by the U.S. Federal Reserve has fallen to about 66%, following a series of weak economic data releases, including an unexpected decline in U.S. jobs in July, a slowdown in consumer price inflation, and weak retail sales.
Investors are also currently focusing on the minutes from the Fed’s latest meeting, scheduled for release on Wednesday, in search of new clues regarding the future of U.S. monetary policy.
The minutes may help markets assess the Fed officials’ stance on inflation and the labor market, and determine the likelihood of interest rate cuts or hikes during upcoming meetings.
Any signals pointing toward tighter monetary policy would support the dollar and bond yields, which could increase pressure on gold, while signals leaning more toward easing could provide support for the precious metal.
Gold Price Forecast for the Coming Period
Gold is currently facing a mix of conflicting factors; Geopolitical tensions and economic concerns continue to provide support for the precious metal as a safe-haven asset, while, on the other hand, rising bond yields, a strong dollar, and higher inflation expectations resulting from rising oil prices are weighing on the metal.
Furthermore, profit-taking following recent gains may contribute to a continued short-term correction, especially after the price of gold reached its highest level since June.
The direction of gold prices today will continue to be influenced in the coming period by developments in the crisis between the United States and Iran, movements in oil prices, and U.S. Treasury yields, as well as statements and decisions by the Federal Reserve and U.S. inflation and jobs data.
