The gold market (XAU/USD) appears to be back in the doldrums on Monday morning as the United States (US) and Iran reportedly exchanged attacks in the Persian Gulf over the weekend.
This ‘stingy’ incident has indirectly dented the ceasefire agreement reached last week, an agreement that previously managed to lower world oil prices and ease investors’ fears of rising interest rates.
Gold recorded a decline of up to 0.9% in the early session this morning, after making a strong 1.6% jump last Friday.
Here are the main reasons why the gold market is ‘rocking’ again:
1. Oil Prices Rise Again, Inflation Risk Appears
Tensions peaked again when a tanker carrying Qatari crude oil was reportedly attacked in the Strait of Hormuz. As a result, crude oil prices surged again due to concerns about disruption to tanker routes.
For those of you who trade gold, remember this formula:
When oil prices rise ➡️ Inflation risk increases ➡️ Central banks are forced to maintain high interest rates ➡️ Gold prices (assets that do not provide dividend/interest returns) will be pressured downward.
In fact, since the conflict last February, gold has actually fallen by around 23% due to this high interest rate narrative
2. Hopes for Peace in Doha (Tuesday)
Despite the tension, a report from Axios stated that both sides have agreed to temporarily halt the attacks and are scheduled to meet tomorrow (Tuesday) in Doha for emergency talks. This news somewhat limits the room for the market to panic excessively.
What About the Status of the US Dollar & Inflation Data?
Before this weekend's incident, US PCE inflation data (the Fed's favorite indicator) was reported to have increased by 0.4% for May, a figure that was still 'slightly' compared to analyst expectations. The data actually caused US bond yields to fall and weakened the US Dollar on Friday.
However, this morning, the US Dollar Spot Index was detected to slowly creep back up as a reflex response to this latest geopolitical conflict.
Commodity Price Status This Morning:
Spot Gold: Shrinked 0.6% to $4,062.47 per ounce.
Silver: Fell 0.8% to $58.67.
Platinum & Palladium: Also recorded a slight decline.
Conclusion for Traders: Gold movements are currently very sensitive to geopolitical news in the Middle East and its impact on oil prices. As long as the talks in Doha tomorrow do not produce solid results, the gold price may continue to move sideways or be pushed down if the US Dollar becomes more aggressive.
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