- Gold’s slide is the clearest sign yet that the Middle East conflict, despite being the classic trigger for safe haven demand, is currently working against the metal because of the inflation and rate path implications of the oil spike rather than through any flight to safety. With Treasury yields and the dollar both climbing alongside oil, gold is caught on the wrong side of a stronger dollar and higher real rate environment, and Waller’s hawkish framing has sharply repriced rate expectations, pushing September hike odds up more than 20 percentage points in a week. Today’s CPI print and the PPI data and Warsh testimony later this week will be the next tests of whether that repricing holds or reverses, and gold is likely to stay sensitive to both the inflation numbers and any further escalation in the Gulf.
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Even a Middle East war can’t buy gold a safe haven bid when the Fed looks set to hike.
Summary:
- Spot gold was down about 0.2% on Tuesday after shedding around 3% the previous session, its biggest daily percentage decline in more than a month
- The US military carried out a third consecutive night of strikes on Iran on Monday, and two tankers came under fire in the Strait of Hormuz, after Trump said the US was reinstating its blockade of Iranian shipping
- Oil futures hit their highest level since mid June, having surged about 9% the previous session, while Treasury yields and the dollar climbed as the conflict reignited over the weekend
- Fed Governor Waller said the central bank may need to raise rates soon if incoming data show inflation staying well above the 2% target, describing monetary policy as being at a crossroads
- Traders have raised the probability of a September rate hike to around 78%, from 57% a week ago, according to CME Group’s FedWatch Tool
- Markets are also watching June US CPI data due later Tuesday, along with PPI data and Fed Chair Warsh’s first semiannual testimony to Congress this week, for further direction on the rate path
Gold fell to a two week low on Tuesday as a surge in oil prices tied to the escalating US-Iran conflict fuelled inflation fears, compounding hawkish comments from Federal Reserve Governor Waller that have reinforced bets on higher US interest rates. Spot gold was down about 0.2% on the day, according to Reuters, extending Monday’s roughly 3% slide, its steepest single day percentage decline in more than a month.
The move comes against a backdrop of rapidly escalating conflict in the Gulf. The US military carried out a third consecutive night of strikes against Iran on Monday, and two tankers came under fire in the Strait of Hormuz, after President Trump confirmed Washington was reinstating its blockade of Iranian shipping. Oil futures surged roughly 9% in the prior session to their highest level since mid June, while Treasury yields and the dollar both climbed as tensions between Washington and Tehran reignited over the weekend, a combination that has left gold competing against a stronger dollar and rising real yields rather than benefiting from its usual safe haven role.
Adding to the pressure, Waller said on Monday the Fed may need to raise rates in the near term if upcoming data continue to show inflation running well above the 2% target, characterising monetary policy as being at a crossroads. Traders responded by pushing up the probability of a September rate hike to around 78%, according to CME Group’s FedWatch Tool, up sharply from 57% just a week earlier. Investors are now looking to June US CPI data due later Tuesday, along with PPI figures and Fed Chair Warsh’s first semiannual testimony to Congress this week, for further confirmation of that repricing.
The gold market’s reaction underscores how unusual this conflict has been for traditional safe haven positioning. Rather than drawing a flight to gold, the combination of an oil driven inflation shock and a Fed turning more hawkish in response has instead pushed the metal lower, even as the same conflict drives other sanctions activity, including the EU’s fresh restrictions on Sudan’s gold trade announced Monday, elsewhere in the gold market.
This article was written by fl6553e4b45d84486a91658a8b3f02bf22 at investinglive.com.