Gold Slides as Middle-East Conflict Fuels Oil Surge and Rate-Hike Talk

On July 20, spot gold fell 0.1% to $4,014.53 per ounce while August U.S. gold futures held at $4,019.80. The dip coincided with Brent crude climbing above $90 a barrel, a 3% jump driven by reduced energy shipments through the Strait of Hormuz amid an escalation in the Middle-East war.

Reuters

The heightened oil price adds to inflation worries, prompting market participants to reassess the “opportunity cost” of holding a non-yielding asset such as gold. Traders using the CME FedWatch Tool now price an 82% probability of a December Federal Reserve rate hike, up from 73% the previous week. Higher rates would further increase that cost, potentially weakening gold demand even as the metal traditionally serves as an inflation hedge.

Reuters

• Kelvin Wong, senior market analyst at OANDA, linked the war-driven oil surge to a broader stagflation risk that could pressure gold prices.

Reuters

• Beth Hammack, President of the Cleveland Federal Reserve, joined other policymakers in signaling that additional interest-rate increases may be required to curb persistent inflation, setting the stage for a contentious Fed meeting chaired by Kevin Warsh.

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• “The weekend escalations increase the risk of a potential full-scale offensive by both sides, which potentially threatens gold prices as the opportunity cost for holding the metal gets higher if this ongoing stagflation fear starts to take hold,” — Kelvin Wong, Senior Market Analyst, OANDA

Reuters

• “On the longer term, I'm more cautious on gold and looking at the key $3,886 level, which if taken out on the downside, could potentially unleash further weakness towards $3,500,” — Kelvin Wong, Senior Market Analyst, OANDA

Reuters

If oil prices remain elevated and the Fed proceeds with a December hike, the combined effect could sustain pressure on gold, pushing it toward the $3,886 support zone identified by market analysts. Conversely, any de-escalation in the Middle-East conflict that eases oil markets may reduce inflation expectations, mitigating the impetus for further rate increases and stabilizing gold’s price trajectory.

Reuters