Key Takeaways
- Gold fell 2% due to escalating Middle East tensions and higher oil prices.
- Investors are increasingly betting on a September interest rate hike by the Federal Reserve.
- Higher oil prices stoke inflation concerns, reducing gold's appeal as an investment.
Global gold prices dropped 2% on Thursday amid escalating Middle East tensions that pushed up oil prices and U.S. Treasury yields, heightening inflation concerns and reinforcing expectations of elevated U.S. interest rates.
Spot gold was down 1.5% at $4,001.17 per ounce by 9:26 a.m. EDT (1326 GMT), after falling as much as 2% earlier in the day. U.S. gold futures also declined, dropping 1.1% to $4,005.20.
The rise in oil prices, driven by Iran's request for Yemen’s Houthis to stand ready to close the Red Sea oil route if the U.S. strikes Iranian power infrastructure, stoked inflation concerns and raised expectations of higher interest rates. This is pressuring gold as a non-yielding asset.
Bart Melek, global head of commodity strategy at TD Securities, stated: 'Oil prices yet again have moved higher, and with the higher Brent levels, I think there’s continued expectations that U.S. yields are likely to go higher, probably maybe even a rate hike as early as September.'
Traders now price in about a 56% chance of a Federal Reserve rate hike in September according to the CME FedWatch Tool. Yields on the benchmark 10-year U.S. Treasury note also drifted higher.
The U.S. dollar gained 0.2%, making gold more expensive for overseas buyers. Despite some near-term economic data softening, persistently high energy prices make it difficult for the Federal Reserve to adopt a dovish stance, according to Fawad Razaqzada, market analyst at Forex.com.
Other precious metals also saw declines: spot silver dropped 2.8% to $56.17 per ounce, platinum slid 0.9% to $1,658.65, and palladium dipped 2.7% to $1,279.25.
Market analysts suggest that even if some near-term economic data softens, the persistent rise in energy prices will likely keep inflation concerns high, making it difficult for the Federal Reserve to adopt a more dovish stance.
'Oil prices yet again have moved higher, and with the higher Brent levels, I think there’s continued expectations that U.S. yields are likely to go higher, probably maybe even a rate hike as early as September.'
Bart Melek, Global head of commodity strategy at TD Securities
