Gold price falls to two-month low on inflation fears

Gold fell to its lowest in two months on Wednesday as risks of prolonged inflation from the Middle East war continue to pile pressure onto the metal.

Spot gold dropped as much as 2% to just above $4,400 an ounce, its lowest since March 27. Silver also lost 4% to around $74 an ounce.

The decline followed further hostilities between US and Iranian forces near the Strait of Hormuz, even as both sides have been touting diplomatic progress towards an interim peace agreement.

“There was some lingering optimism, but as this continues to drag out, ​that optimism wanes,” Peter Grant, vice president and senior metals strategist at Zaner Metals, told Reuters on Wednesday.

Bullion has lost 15% since the US-Iran conflict erupted in late February, as the closure of the Strait of Hormuz sent energy prices soaring and ignited concerns over inflation. This raised expectations that global central banks would keep interest rates high, a scenario that hurts non-yielding assets like gold.

In the US, market participants now see the energy-driven inflation prompting the US Federal Reserve to hike its benchmark overnight interest rate by 25 basis points by year-end, according to a Reuters poll.

“While hope of a US-Iran deal has offered some support, the situation remains fragile and persistent, as inflation fears continue to loom over precious metals,” TD Securities analyst Ryan McKay said in a note to Bloomberg.

However, the outlook for gold remains bright longer term, as major banks including JPMorgan and Goldman Sachs still see the metal reaching at least $5,000/oz. despite the recent weakness.

So far this year, gold prices have risen by 4% even after a sharp falloff from a record near $5,600 reached back in January.

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