Gold prices extended their upward momentum for the second consecutive session after information emerged that US President Donald Trump is ready to end the conflict with Iran even if the Strait of Hormuz is still closed.
The precious metal at one point increased by 2.4% in Tuesday's session before narrowing the increase, trading around the 4,570 USD/ounce mark. This upward momentum came after The Wall Street Journal quoted sources as saying that Mr. Trump told his advisors that he agreed to end the US military campaign against Iran, even if the vital oil transport route through the Strait of Hormuz has not been fully cleared, thereby raising expectations that the conflict that has lasted for a month may soon cool down.
Earlier, US Federal Reserve (Fed) Chairman Jerome Powell said that long-term inflation expectations in the US remained controlled, despite sharply rising oil prices due to war events increasing inflationary pressure and strengthening expectations of a possible tightening of monetary policy. He emphasized that the current policy stance of the central bank is in "a suitable position to wait and observe".
US Treasury bond yields fell after Mr. Powell's statements supported gold prices, as the opportunity cost of holding non-genuine assets like gold fell. However, the money market is still betting that the Fed will not cut interest rates this year.
Analysts at UBS Global Asset Management said this view is "excessive", and believe that the Fed is still likely to ease policy this year.
Investors are also assessing mixed signals from the US as the White House threatens to expand attacks on Iran, including key civilian infrastructure. Meanwhile, Tehran has passed a law imposing fees on ships passing through the Strait of Hormuz and is urging the Houthi forces in Yemen to prepare to resume operations targeting transportation activities in the Red Sea. Iran is also launching a drone attack on a Kuwaiti oil tanker off Dubai.
Mr. David Wilson - Commodity Strategy Director at BNP Paribas Bank said that the market is currently reacting mainly to news headlines, while in reality there have not been many significant changes. According to him, if a peace agreement appears, gold prices may increase sharply, conversely, if the US launches a land offensive campaign, gold may fall and shift to a downward trend.
These developments raise concerns about the possibility of prolonged conflict, pushing energy prices higher and forcing central banks to raise interest rates to control inflation, a disadvantage for non-performing assets such as gold. Along with liquidity pressure in the financial market, gold prices are currently heading towards a decrease of more than 13% in the month.
As of 10:10 am London time, spot gold prices rose 1.3% to 4,568.17 USD/ounce. Silver rose 4.5% to 73.25 USD/ounce, while platinum and palladium also recorded gains. The Bloomberg Dollar Spot index fell 0.1% after rising 0.3% in the previous session.
