Gold slipped toward $4,100 per troy ounce in Wednesday's early Asian session, weighed down by a fresh flare-up in military tensions between the US and Iran that has put investors around the world on edge. Adding to the shift in mood, traders have scaled back their bets on a Fed rate hike after a run of weaker US jobs numbers.
Why the pressure built on gold
Gold usually shines in uncertain times, but this time the picture is more tangled. On one hand, rising tensions in the Middle East should have lifted safe-haven demand. On the other, that same tension has revived fears of energy-driven inflation, and those fears are capping any rally in the non-yielding metal. The result is that after a decent pullback on Monday, gold stayed soft near the $4,100 mark through Tuesday.
The US military strikes Iran
On Tuesday, US Central Command, known as Centcom, announced sweeping action against Iran. "US Central Command forces have begun launching a series of powerful strikes against Iran to impose heavy costs for targeting and attacking commercial shipping crewed by innocent civilians in an international waterway," Centcom said.
The US military added that the strikes were a response to Iranian attacks on three commercial vessels that were transiting the Strait of Hormuz. The strait is one of the world's most critical oil corridors, so any confrontation there directly rattles global energy supply and financial markets.
A fragile peace under threat
This renewed friction threatens to further destabilize relations between Washington and Tehran. Only last month the two countries inked an interim peace deal that ended fighting on all fronts and reopened the Strait of Hormuz. The fresh strikes now put that fragile truce at risk. If the tensions deepen, they could raise energy-driven inflation fears, which in turn would weigh on the non-yielding bullion.
A shifting view on the Fed
After weaker US non-farm payrolls data, traders have trimmed their expectations for a Fed rate hike. The link between interest rates and gold runs deep, because gold pays no interest of its own. When rates stay low, the cost of holding gold falls and its price finds support, whereas higher rates typically weigh on the yellow metal.
Why gold is seen as a safe haven
Gold has played a key role throughout human history. For centuries it has been widely used as a store of value and a medium of exchange. Today, beyond its shine and its use in jewelry, the precious metal is widely regarded as a safe-haven asset, meaning it is considered a sound investment during turbulent times. Gold is also seen as a hedge against inflation and against depreciating currencies, because it does not rely on any specific issuer or government.
Central banks are the biggest buyers
Central banks are the largest holders of gold. Aiming to support their currencies in difficult times, they tend to diversify their reserves and buy gold to improve the perceived strength of the economy and the currency. High gold reserves can be a source of trust in a country's solvency. According to data from the World Gold Council, central banks added 1,136 tonnes of gold worth around $70 billion to their reserves in 2022, the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly building up their gold reserves.
Gold's inverse tie to the dollar
Gold has an inverse correlation with the US Dollar and US Treasuries, both of which are major reserve and safe-haven assets. When the Dollar weakens, gold tends to rise, allowing investors and central banks to diversify their holdings in turbulent times. Gold is also inversely correlated with risk assets. A strong rally in the stock market tends to weaken gold, while sell-offs in riskier markets usually favour the metal.
What moves the price
A wide range of factors can move the price. Geopolitical instability or fears of a deep recession can quickly send gold higher thanks to its safe-haven status. As a yield-less asset, gold tends to climb when interest rates are lower, while a higher cost of money usually drags on the yellow metal. Even so, most of the moves hinge on how the US Dollar behaves, since the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep gold in check, whereas a weaker Dollar is likely to push prices up.
Ripples across other currencies
The Middle East turmoil did not stay contained to gold. On Tuesday, GBP/USD stayed on the back foot, slipping back toward the 1.3370 zone. Cable came under pressure soon after testing the 1.3400 neighbourhood as investors turned more cautious in response to the renewed geopolitical noise. EUR/USD was similarly weak ahead of the Asian open, returning to the low-1.1400s on the back of renewed demand for the US Dollar. Fresh jitters in the Middle East supported the safe-haven universe and weighed on risk sentiment. From here, attention shifts to Wednesday's FOMC Minutes.
Eyes on rates and guidance
The Reserve Bank of New Zealand is widely expected to raise the Official Cash Rate by 25 basis points from 2.25% to 2.50% on Wednesday, snapping a three-consecutive-meeting pause. Meanwhile, central banks around the world are growing more reluctant to signal what comes next. From the Federal Reserve to the European Central Bank and the Bank of England, policymakers are pushing back against forward guidance. After years of telling markets what might lie ahead, traders now face the possibility that they will be told a good deal less.
