Gold is showing little movement today, holding near $2,386 per ounce after a drop of over 1.4% yesterday.
This weak performance comes as market fears over the fallout from the Israel-Iran conflict have eased. Investors are hopeful that energy supplies flowing from the region to the rest of the world will not face major disruption.
Scenarios that could shock oil prices, according to Axios, include Israel striking Iran’s key export facilities, Iran targeting production sites in the region, or the closure of the Strait of Hormuz.
None of these developments have occurred so far, which has kept fears of renewed inflation and persistently high interest rates in check.
The Editorial Board of the Wall Street Journal believes that global oil production capacity can absorb supply disruptions unless they are catastrophic, such as a closure of the Strait of Hormuz.
As long as the conflict does not severely disrupt energy supplies, markets may downplay its impact. This limits the geopolitical risk premium that would otherwise support further gains in gold prices.
However, if diplomacy fails to contain the conflict soon, Iran may choose to escalate it by shutting down the Strait of Hormuz, according to experts cited by The Journal. This concern could prompt the US and Gulf states to intensify diplomatic efforts or even pull the US directly into the conflict.
Beyond the military situation, markets are watching developments in the US-China trade dispute, where talks have yet to make meaningful progress. The lack of a breakthrough could push the US to impose restrictions on semiconductor exports and manufacturing equipment, threatening billions in American corporate sales, according to The Journal.
Such moves might trigger further escalation by China, which holds leverage through its dominance in rare earth metals. Renewed tensions could disrupt supply chains and drive inflation even higher.
Although recent inflation data do not suggest a sudden surge in prices, experts told The New York Times that the effects of tariffs and supply chain disruption may take months or even over a year to feed through to consumer prices. This is partly because sellers can rely on pre-tariff stockpiles and offer discounts for a period.
Failure to resolve these issues could see inflation rebound, keeping interest rates high at levels that the economy may not be able to bear. The chief economics commentator at The Journal wrote last week that the Federal Reserve should shift its focus from fighting inflation to supporting the economy through rate cuts, given signs of labor market weakness.
Persistently high rates or further increases, along with rising bond yields, may not weigh on gold. On the contrary, they could support demand for the safe-haven asset as worries about slowing growth and recession deepen.
Uncertainty in the bond market remains high compared to levels before the Ukraine war in 2022, as shown by the ICE BofAML MOVE index, which measures fear in the US Treasury bond market. This could limit the downward pressure of rising yields on gold prices.
Markets are awaiting tomorrow’s Fed decision on interest rates, with attention focused on Jerome Powell’s remarks after the announcement. A stronger Fed stance on keeping rates elevated for longer might temporarily pressure gold. However, renewed concerns about economic growth could quickly restore demand for the yellow metal.
Data from China also continue to fuel economic worries. Recent figures show industrial production and fixed-asset investment growth slowing more than expected, which could bolster demand for safe-haven assets like gold.
