Gold Price Drops Nearly 2% Amid Growing Concerns Over Inflation and Middle East Tensions
Gold Prices Fall as Middle East Tensions Escalate Inflation Concerns
Gold prices plummeted nearly 2% on Monday, as escalating tensions in the Middle East heightened inflation concerns and reinforced expectations that central banks may keep monetary policy tighter for longer.
Spot Gold Prices and Futures Fall
Spot gold prices fell 1.9% to $4,451.65 per ounce as of 10:01 a.m. EDT (1401 GMT), while U.S. gold futures dropped 2.5% to $4,479.20. The decline in gold prices was largely driven by the strengthening U.S. dollar, which made metals priced in the currency more expensive for holders of other currencies.
Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data
Inflation Fears Rise as Oil Prices Extend Gains
Oil prices extended gains, adding to inflation fears linked to the Iran conflict. The conflict could lead central banks to raise interest rates to curb rising price pressures. According to CME Group's FedWatch tool, traders have factored in a roughly 56% chance of at least one U.S. rate hike by the year-end.
| Inflation Expectations | Probability of Rate Hike |
|---|---|
| 2% | 56% |
| 3% | 34% |
| 4% | 10% |
Gold's Attractiveness Fades in High-Interest-Rate Environment
Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline
Although gold is often regarded as an inflation hedge, its attractiveness tends to fade in a high-interest-rate environment because it does not generate yield. Market participants will turn their attention to a series of U.S. jobs data releases due this week, along with remarks from Federal Reserve officials.
Central Banks Expected to Remain Net Buyers
Once the geopolitical situation stabilizes and the energy shock begins to fade, we expect investors to refocus on the structural themes that have underpinned the bull market in gold over recent years, according to Saxo Bank analyst Ole Hansen. He added that central banks are expected to remain net buyers over the coming year.
| Precious Metals Prices | Change |
|---|---|
| Spot Silver | -1.7% |
| Platinum | -0.4% |
| Palladium | -0.8% |
Supply Constraints Offset by Weakening Autos Demand
Palladium is moving towards balance as supply constraints are offset by weakening autos demand, according to Morgan Stanley.
Investor Takeaway
Investors should be cautious of gold prices due to growing inflation concerns and Middle East tensions.
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