Gold prices narrowed down part of the increase at the beginning of the session as traders considered the possibility that the US Federal Reserve (Fed) would raise interest rates to curb rising inflation due to the conflict in the Middle East.
The precious metal once fell 0.3% before returning to an increase of about 1%. Previously, the price had climbed to a one-month high thanks to safe-haven demand. US President Donald Trump declared that Washington would continue its military campaign against Iran "as long as it is necessary", and for the first time outlined four goals he wants to achieve to minimize the threat from Tehran. Meanwhile, silver and palladium prices fell.
Risk avoidance sentiment on Monday caused global stocks to fall before recovering. The USD rose sharply and US Treasury bond yields rose due to concerns about inflationary pressure from high oil prices and increased government spending. Oil prices rose the most in four years.
According to Mr. Frank Monkam, Head of Multi-Asset and Trading Strategy at Buffalo Bayou Commodities, gold's upward momentum is restrained as the market begins to consider higher inflation risks. This could force the Fed and other major central banks to raise interest rates to control price pressures. In fact, swap traders have narrowed expectations about the level of interest rate cuts this year. Higher interest rates are often disadvantageous for gold because this is a non-rotating asset.
However, prolonged geopolitical tensions along with strong changes in the US administration's foreign and trade policies are still the foundation for the long-term upward trend of gold. This upward momentum is also supported by strong buying activities by central banks and investors' concerns about inflation as well as currency devaluation.
Analysts at TD Securities said in a report that gold will continue to benefit from geopolitical instability, reduced risk appetite and inflationary concerns as energy costs soar. This group believes that speculators who have reduced gold buying positions in recent weeks may see developments in the Middle East as an opportunity to return to the market.
Since the beginning of the year, gold prices have increased by about 23%, despite a sharp correction from a historic peak of over 5,595 USD/ounce at the end of January.
Tehran's retaliatory attacks included the United Arab Emirates, an important link in the global gold trading chain. The UAE provides gold to buyers in China and India, and is also a transit center for precious metals from London, the world's largest spot market. The country has partially closed its airspace and temporarily suspended flights in Dubai to respond to attacks, causing temporary disruptions to gold flows.
A trader said Monday was dedicated to urgently redirecting shipments that were expected to transit through Dubai before reaching the final destination. Gold is usually transported in the cargo holds of passenger flights, especially on the bustling London – Dubai route.
Although the current disruption is only temporary, the prolonged flight suspension in the UAE could pose a more serious challenge to gold supply for traders in India and other Asian markets. During the 2020 pandemic outbreak, airline closures once disrupted the global market as traders could not transport gold between trading centers to take advantage of price differences.
Mr. Manish Kabra, Head of US stock strategy at Societe Generale, said that most of the risk premiums related to geopolitical tensions have been reflected in oil prices. He emphasized that gold is still the most preferred hedge, a disciplined diversification asset that tends to expand its rally in oil price shocks.
Even before the conflict with Iran broke out, the US administration pursued a tougher foreign policy. With Washington deploying its largest military force in the Middle East since 2003, gold prices recorded its seventh consecutive month of increase in February, the longest streak of increases since 1973.
As of this morning's trading session, spot gold prices increased by 0.95% to 5,349.52 USD/ounce. Silver prices fell 4.6% to 89.43 USD/ounce. Palladium fell 0.62%. Bloomberg Dollar Spot Index increased by 0.7%.
