Gold price falls as US-Iran hostilities rekindle Fed hike bets

Gold declined as escalating tensions in the Middle East rekindled expectations that the Federal Reserve may need to hike interest rates to contain stubborn inflation. 

Bullion fell as much as 2.3% to trade below $4,000 an ounce as Iran-US hostilities worsened. The dollar and bond yields pushed higher, weighing on bullion. Brent topped $85 a barrel, climbing for a fourth day and deepening inflation fears.

The US struck an oil tanker near Iran’s main export terminal for the first time since the restart of the blockade on the Islamic Republic’s ports. President Donald Trump has pledged to intensify the bombardment until Tehran stops attacking ships in the Strait of Hormuz and agrees to open the waterway. The flare up has rekindled concerns over energy inflation and higher interest rates, sparking pressure for bullion prices. 

“Precious metals have come under selling pressure as oil prices move back into the $80s/bbl range,” said Ryan McKay, senior commodity strategist at TD Securities. TD’s pricing simulation model shows modest bearish positions in gold, with trend-following commodity trade advisors likely selling again when prices hit around $3,790, according to McKay.

Gold has traded around $4,000 an ounce in recent weeks after losing 14% in the second quarter, its worst showing since 2013. That retreat was driven by expectations that the Fed could hike interest rates to manage inflationary pressures driven by the war, creating headwinds for non-yielding bullion.

Gold is now roughly 26% below its peak near $5,600 an ounce in January, only its fifth drawdown of more than 25% since 1960, analysts at Morgan Stanley wrote in a report. The bank sees gold prices moving higher, though this is “contingent on the Fed refraining from additional rate hikes,” the analysts said.

Spot gold fell 2.1% to $3,974.86 an ounce as of 4:15 p.m. in New York. Silver was down 3.93% to $55.53, with platinum and palladium also trading lower. The Bloomberg Dollar Spot Index rose 0.2%. 

(By Yvonne Yue Li)