Gold Drops Amid Lack of Prospects for Middle East Conflict Settlement and Rising Pessimism Over Interest Rates
Written by Samer Hasn, Senior Market Analyst at XS.com
Gold falls sharply in early morning trading at the start of this week by nearly 3 percent, trading near the 4,150 dollars per ounce level.
Gold’s continued drop comes amid rising pessimism about the possibility of returning to negotiations to end the Middle East war, which plays a major role in fueling high inflationexpectations. This in turn worsens pessimism about the path of monetary policy and increases pressure on the yellow metal.
After hope quickly faded for reaching an understanding between the United States and Iran on the sidelines of the UN General Assembly meetings, pessimism deepened regarding the diplomatic path as President Donald Trump rejected Iran’s proposal to return to negotiations and renewed conditions requiring giving up the nuclear program. While Axios reported yesterday that Trump might return to negotiations with Iran this week, the market did not respond to the statement. Instead, investors seem to be increasingly ignoring Trump media maneuvers aimed solely at cooling rising oil prices.
Iran appears to hold firm to its maximalist demands of lifting the US naval blockade, unfreezing assets abroad, and leaving its nuclear program untouched. This hardening position comes despite attempts by mediators to pressure Iran to make concessions to revive negotiations, according to the Wall Street Journal. However, Iranian leaders believe they can confront the US blockade and even renewed waves of strikes, according to regional officials who also spoke to the newspaper.
With both sides holding on to their maximalist demands, the region may remain stuck in a gray area between no war and no peace, punctuated by days of unconstructive calm and days of escalation and shocks to the energy market. During this time, the United States will try to tighten the noose on Iran and export as much crude as possible from the region, which reached nearly 13 million barrels per day this month, according to Reuters, or over 20 million barrels as a US official told Axios.
Although sustained supply flows may gradually help curb crude rallies, I believe Iran will seek to globalize the costs of this blockade on both the regional and global economies by continuing to target shipping in the Strait of Hormuz and deepening ties with the Houthis in Yemen to unify the two fronts to serve Iranian interests of pressuring the global economy to stop the war and extract concessions. This scenario raises the risk of renewed targeting of oil production, export, and refined-product infrastructure in the region, keeping the risk premium high in pricing and limiting investment liquidity flows from the region, which worsens pressure on the yellow metal and could prevent its recovery anytime soon.
In addition, despite massive energy price inflation and record diesel prices, the US economy shows no signs of demand destruction from inflation, as Purchasing Managers’ Index data released by S&P Global last week reinforced this narrative. This is likely to make monetary policymakers more inclined toward tightening, which markets are pricing today with a probability of around 57 percent that the Federal Reserve will raise interest rates by half a percentage point before the end of this year, according to CME FedWatch figures. This is reflected in rising Treasury bond yields, which increase the opportunity cost of holding gold and pull liquidity away from it, alongside liquidity constraints in the Middle East and Asia resulting from the war.
Zaid Barem / ymm
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