Gold price rises as traders weigh Middle East risk and stronger dollar

Gold rose, after tumbling more than 4% in the previous session, as traders weighed a stronger dollar against demand for safer assets as war escalates in the Middle East.

Bullion climbed above $5,100 an ounce, with dip-buyers entering the market after the end of a four-day winning streak on Tuesday. A gauge of the dollar has rallied 1.4% this week and bond yields advanced. Traders scaled back bets on monetary easing due to heightened inflationary risks from surging energy prices.

A broad selloff across equities also forced some investors to liquidate their positions on Tuesday to meet margin calls in other parts of their portfolios.

The gold market is experiencing a standard “portfolio risk-reduction move,” said Peter Kinsella, global head of forex strategy at Union Bancaire Privee, UBP SA. “It’s entirely consistent with what we have seen in previous conflicts, but I note that long gold positioning in the futures space is not especially high – and that should limit the extent of any down move,” he said.

Bullion has rallied by almost a fifth this year — hitting an all-time high above $5,595 an ounce in late January — with demand supported by persistent geopolitical and trade tensions as well as concerns about the US Federal Reserve’s independence.

Markets are on edge as the US-Israeli war on Iran reverberates across the region. Israel bombarded Tehran with a fresh wave of strikes on Tuesday, and hit a building in the city of Qom where Iranian clerics were meeting to elect a successor to Supreme Leader Ayatollah Ali Khamenei, Israel’s Kan News reported. Iran’s semi-official Mehr news agency said the building was attacked but wasn’t in use at the time.

“I think we will definitely see a recovery for gold,” said Kinsella, adding that longer-term drivers remain unchanged. “If anything, an inconclusive outcome to the war highlights ongoing geopolitical risks to a greater extent than before.”

Inflationary risks from surging energy prices, however, could limit bullion’s gains by forcing the Fed and its global peers to hold interest rates steady for longer, or even hike them. Traders have priced in 80% odds of more than one quarter-point rate cut by the Fed this year, after fully pricing in two cuts as recently as Friday. Higher borrowing costs are a headwind for precious metals, which don’t pay interest. 

In an attempt to avoid a potential energy crisis, President Donald Trump said the US will provide naval escorts and insurance guarantees to ensure safe passage for oil tankers and other vessels through the Strait of Hormuz. Traffic through the strategic waterway, through which about a fifth of the world’s oil and gas must pass, has all but halted because of the war.

Spot gold rose 0.4% to $5,110.05 an ounce as of 8:05 a.m. in Singapore. Silver rose 0.1% to $82.11. Platinum advanced, while palladium slipped 0.2%.

(By Yihui Xie)