Gold Plunges 5%: Dollar & Yields Strengthen, War Risk Premium Shifts
Gold prices plunged more than 5%, ending a four-day rally, after a strengthening US dollar and rising bond yields eclipsed its appeal as a safe-haven asset amid escalating Middle East conflicts.
Selling pressure was also exacerbated by a sharp stock market decline on Tuesday (February 3), which forced some investors to liquidate precious metal positions to meet margin calls elsewhere in their portfolios. This view was echoed by commodity strategists from Societe Generale SA and MKS PAMP SA.
Meanwhile, surging energy prices raised concerns that inflation would flare up again, which could force the Federal Reserve to keep interest rates high for longer. While gold has historically been seen as a hedge against inflation, higher interest rates typically put pressure on non-yielding precious metals—especially when the dollar strengthens.
The US dollar index (the greenback) rose about 1.5% this week, while the yield on the 2-year US Treasury note approached its highest level this year on Tuesday. The market now values the chances of a Fed rate cut this year as much smaller: expectations have shifted to more than one 25 bps cut, after initially pricing in two full cuts on Friday.
“The experience of 2022—when the Ukraine war drove up oil prices and fueled global inflation—is likely a blueprint for the current situation,” wrote Thu Lan Nguyen, Head of FX & Commodity Research at Commerzbank AG. Back then, the Fed responded early by raising interest rates, the dollar strengthened, and gold tended to weaken throughout the year.
In spot trading, gold fell 4.5% to $5,082.22 per ounce (10:52 a.m. New York time). Silver plunged 7.8% to $82.36, while platinum and palladium also fell.
Volatility in precious metals has been high in recent months, as this year’s sharp rally—both gold and silver reached records—and wild intraday swings have pushed some trading firms close to their maximum risk limits.
Gold rallied earlier in the week as investors shied away from riskier assets, and the scale of the war widened on Tuesday. US President Donald Trump declared the US would continue its military offensive "for as long as necessary," while Israel announced a "wave of attacks" targeting Iranian command centers. Tehran reportedly attacked oil and gas infrastructure and threatened shipping lanes in the Strait of Hormuz.
Even before the US-Israeli attacks over the weekend, signs of US inflationary pressure were already evident: manufacturing input prices in February surged at the fastest pace since 2022, according to the Institute for Supply Management (ISM) indicator. JPMorgan Chase CEO Jamie Dimon also warned that inflation could become a "skunk at a party" for the US economy—a distraction that could spoil the mood.
Despite the sharp correction, gold is still up more than 25% so far this year, supported by geopolitical and trade tensions, as well as concerns about the Fed's independence. Resurgent inflation fears and currency weakness have also provided fresh impetus for the long-term rally.
Swiss private bank Union Bancaire Privée (UBP SA) believes there is still "plenty of room" for gold to challenge its record high of over $5,595 per ounce set in late January if the Middle East conflict continues for several weeks. On Monday, gold also closed at its highest level in more than a month.
In addition to disrupting energy supplies, the war has also created obstacles to the physical flow of precious metals. The United Arab Emirates—a key route for the global gold trade—closed its airspace over the weekend, while several airlines suspended operations in the Gulf region. As a result, shipments of gold and silver typically carried in the cargo holds of passenger planes have also been halted.
Several representatives of trading and logistics companies said metal shipments to and from Dubai have now been suspended indefinitely. Overland shipments to other airports in the region are also considered high-risk due to the high-value commodities involved, according to sources who requested anonymity.
Source: Newsmaker.id
