Gold price back above $4,200 on US-Iran deal progress

Gold advanced on Monday to recover from a one-week low as reports of progress in US-Iran peace talks eased some concerns over prolonged inflation.

Spot gold rose 1.2% during the early hours of trading in New York, bouncing back above the $4,200/oz. mark. US gold futures, meanwhile, were little moved, trading at around the same levels.

The move followed reports of positive talks between the US and Iran to permanently end the months-long war in the Gulf region, with officials from both sides claiming to have made “encouraging progress” at their first round of talks in Switzerland.

The talks came after an interim agreement reached last week that began the process of de-escalation, though tensions over Lebanon and the Strait of Hormuz still remained, which weighed on the markets.

Bullion has declined by about 20% since the start of the conflict at the end of February, as soaring energy prices from the closure of the Strait of Hormuz induced fears of global inflation. This in turn increased the chances of central banks hiking interest rates. Gold, which is non yielding, loses appeal under that scenario.

In the US, the market is essentially penciling in a rate hike this year, after new Federal Reserve chair Kevin Warsh adopted a hawkish tone on inflation during his first policy meeting. The CME FedWatch Tool currently shows a 89% chance of a Fed hike in December, up from 61% before last week’s FOMC meeting.

“Energy prices will remain a key short-term driver for the precious metal space,” ​Saxo Bank analyst Ole Hansen said in a note to Reuters on Monday, citing the “ongoing bumpy talks” between the US and Iran that could put pressure on oil prices and elevate gold.

Banks cautious on gold

Still, major banks remain cautious on gold until a full resolution is reached and the Fed’s monetary path becomes clearer. Last week, Goldman Sachs slashed its year-end price target from $5,400 down to $4,900, after pricing in the potential Fed rate hike.

“Our gold price views remain structurally constructive but tactically cautious, with near-term downside risk and medium-term upside risk,” the bank’s analysts wrote in a note on Friday.

Bank of America also said on Friday that its $6,000 forecast now appears unlikely, “as the market would need to fully price out rate hikes for such levels to be reached. However, the original premise ⁠underpinning the ​bank’s bullish gold call — unorthodox US macro policy — remains ​intact, it added.

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