Gold price falls sharply on war-induced inflation fears

Gold prices declined sharply toward the $5,000-an-ounce level on Tuesday as a stronger US dollar and prospects of higher interest rates weighed on the haven metal.

Spot gold fell as much as 6% to nearly $5,018 an ounce, a dramatic reversal from the one-month high above $5,400 an ounce set the previous session. Gold futures, meanwhile, saw a smaller decline of more than 4%. Silver also plunged almost 12% to under $80 an ounce.

Bullion has now wiped out all of its gains from last week, though it remains up by more than 17% on the year, as is silver.

The latest drawdown, according to some analysts, was driven by a shift into more attractive assets as tensions in the Middle East continue to escalate and some potential headwinds for the metal emerge.

With the Iranian conflict entering its fourth day, the US dollar rose above a one-month peak, making the dollar‑priced bullion less affordable for holders of other currencies.

Also weighing on gold is the decreased chances of a Federal Reserve rate cut, as the Middle East conflict has already resulted in a spike in energy prices, which could keep inflation elevated.

Dip ‘short-lived’

“Historically, gold has benefited from low-interest rate environments, but the current situation is different; we are witnessing gold rising despite lower expectations for rate cuts,” said Rania Gule, senior market analyst at XS.com, referring to the metal’s rally in recent weeks.

“In my opinion, this confirms that the geopolitical factor temporarily outweighs the monetary factor, and investors prefer hedging against systemic risks even if the cost of holding a non-yielding metal rises,” she added.

Bob Haberkorn, senior ​market strategist at RJO Futures, believes Tuesday’s move lower only appears to ​be driven by a flight to liquidity due to a strong dollar and bond yields trading higher.

“However, this dip in prices is likely to be short‑lived, and flight ​to safety flows driven by geopolitical risk should support higher gold and silver ​prices,” he told Reuters.

Longer term, the market remains largely bullish on gold, with major banks such as BNP and JPMorgan forecasting prices to rally beyond $6,000 by the end of this year.

(With files from Bloomberg and Reuters)