Gold Weakens Amid Surge in Oil Prices, Concerns About Hawkish Fed
Gold prices fell to around US$4,100 per troy ounce on Friday (July 10), down around 1.5% for the week. This decline was triggered by surging crude oil prices and escalating geopolitical tensions between the United States and Iran, which fueled concerns that the US Federal Reserve (the Fed) would maintain a tight monetary policy for longer.
Oil prices surged around 5% in the week following renewed attacks between US and Iranian forces. Rising energy prices have increased the risk of inflation, leading market participants to estimate a 58–60% chance of the Fed raising interest rates again in September. This has negatively impacted gold, a non-yielding asset.
Market participants will be closely watching the release of US inflation data next week and the testimony of Fed Chairman Kevin Warsh for clues regarding the direction of interest rate policy. Meanwhile, the minutes of the Fed's June meeting showed growing concerns among officials about inflation, with some even supporting an interest rate hike before ultimately deciding to keep rates unchanged.
In the physical market, gold traded at a wide discount in India due to high price volatility. Conversely, gold demand in China remained stable. China's central bank also reported the largest monthly increase in gold reserves in more than two and a half years in June, reflecting continued strong interest in gold purchases by the official sector.
Reasons for the Decline in Gold Prices
Oil prices surged due to the escalating US-Iran conflict, fueling concerns that inflation would rise again.
Expectations for a Fed rate hike increased because higher inflation could potentially force the central bank to maintain a tight monetary policy.
US bond yields tended to strengthen, prompting investors to shift to interest-bearing assets rather than non-yielding gold.
Impact
Gold prices were depressed because the opportunity cost of holding gold increased when interest rates rose.
Financial markets became more volatile, particularly for safe-haven assets and energy commodities.
Investors will be more cautious in awaiting US inflation data and the next Fed decision, as both will determine the short-term direction of gold prices.
If oil prices continue to rise and inflation flares up again, gold could potentially face further pressure, although geopolitical tensions could still provide support as a hedge.
Source: Newsmaker.id
