Gold falls as inflation revives rate-hike bets
Gold has dropped from its January peak as energy-driven inflation and a stronger dollar reshape expectations for US interest rates.
By Sofia Marchetti · World Affairs Correspondent
3 min read
Gold prices have fallen sharply even as war in the Middle East has kept global markets on edge, according to Al Jazeera. The decline matters because investors often buy gold during crises, but rising inflation and interest-rate expectations are now weighing on the metal.
Al Jazeera reported that gold has been under pressure since the United States and Israel attacked Iran in late February, beginning a months-long war. Prices fell from $5,303 per troy ounce on January 28 to $4,235 on Friday, the outlet said.
The main pressure point is inflation, according to Al Jazeera. The report said investors now expect central banks to delay interest-rate cuts and may even price in rate increases if policymakers try to slow price growth.
Oil disruption feeds inflation concerns
Al Jazeera traced much of the latest inflation pressure to the Strait of Hormuz. The outlet reported that Iran has blocked traffic through the waterway since the start of the war in retaliation against the US and Israel, disrupting a major route for oil and gas shipments.
Energy prices rose after the disruption, and that fed broader inflation, according to Al Jazeera. In the United States, inflation reached 4.2 percent, its highest level in three years, while the job market remained steady, reducing expectations for near-term rate cuts, the outlet reported.
Gold is often used as a hedge against inflation, but higher interest rates can make it less attractive. Justin Cardwell, head options analyst for OptionSpreaders.com, told Al Jazeera that gold does not pay dividends or generate income, so investors rely on price gains.
Cardwell said gold is close to “real money” as an asset, but its appeal fades when rates are high and investors favor the dollar. That dynamic has put gold in direct competition with interest-bearing assets, according to the analysis reported by Al Jazeera.
Stronger dollar adds pressure
The war has also supported the US dollar, Al Jazeera reported. Because gold is priced in dollars, a stronger dollar tends to make gold less attractive, Collin Plume, chief executive of Noble Gold Investments, told the outlet by email.
Plume said gold is under pressure because the market has shifted from expecting rate cuts to considering the possibility of a rate increase. He told Al Jazeera that gold is especially sensitive to interest-rate expectations, and that the rate side is currently outweighing inflation support for the metal.
The CME FedWatch tool now puts the chance of a US Federal Reserve rate increase by December at more than 50 percent, according to Al Jazeera. Before the war with Iran, President Donald Trump had pressed the Fed to cut rates sharply, the outlet reported.
Al Jazeera also cited London Stock Exchange Group data showing gold had fallen below $4,160 an ounce at one point, its lowest level of the year, and was down 9 percent in a month. The move reflected investors selling gold as inflation and rate concerns gained force, according to the report.
Gold finished slightly higher on Friday after reports of a possible US-Iran deal, Al Jazeera said. Cardwell told the outlet that signs of the war ending would likely help gold because investors would assume inflation could ease, though he said that process would take several months and other factors could still limit price gains.
This story draws on original reporting from Al Jazeera.