Gold price declines on inflation fears, liquidity stress

Gold declined on Thursday as a strengthening dollar and prospects of less monetary easing dimmed its appeal to investors despite the escalating war in the Middle East.

Spot gold fell by as much as 1.5% to $5,053 an ounce, erasing all of its gains this week. US gold futures also declined about 1% to around $5,080 an ounce in New York.

Gold has been trending up in recent weeks with the build-up of geopolitical tensions in the Middle East. The metal gained around 3% through February, steadily recovering from the end-of-January selloff that saw prices crater as much as 12%.

This week’s downward move coincides with heightened inflationary fears stemming from the war in Iran, which has cut off a significant portion of the global energy supply. High inflation is likely to decrease the chances of a US Federal Reserve rate cut, hurting non-yielding assets like bullion.

Swaps traders are currently pricing in about 35 basis points of rate cuts by year-end, compared with 60 basis points at the end of last week.

Some investors also sold gold for a source of liquidity to cover losses in the US equities market.  

Some of the weakness in gold “looks driven by equity‑led risk‑on moves, particularly during the US session, with investors using gold as a source of liquidity rather than questioning the fundamentals,” said Ewa Manthey, a commodity strategist at ING Bank.

“That pressure tends to ease once equity momentum fades, leaving the broader support for gold intact,” she added.

For the year, gold remains up by about 18%, underpinned by heightened geopolitical and trade tensions as well as concerns about the Federal Reserve’s independence.

(With files from Bloomberg)