Key Takeaways:
Spot gold fell 0.4 percent to $4,809.71 per ounce as of 0155 GMT, pushing its decline to roughly 8 percent since late February as a temporary ceasefire between the U.S. and Iran appears close to collapse, strengthening the U.S. dollar and renewing inflation fears.
"Gold prices are lower today after the U.S.-Iran war ceasefire that markets celebrated last week appeared to be breaking down," said Ilya Spivak, head of global macro at Tastylive. "That has revived the now-familiar 'war trade' dynamics... Crude oil prices gained, which echoed into inflation expectation and drove up both yields and the U.S. dollar."
The dollar index firmed, making bullion more expensive for other currency holders, while benchmark 10-year U.S. Treasury yields gained 0.5 percent. Oil prices jumped more than 5 percent after the U.S. seized an Iranian cargo ship, the Touska, for attempting to run its blockade of Iranian ports. Iran has vowed to retaliate, and a second round of peace talks is now in doubt.
While gold is traditionally considered an inflation hedge, the prospect of central banks raising interest rates to combat rising prices crimps demand for the non-yielding asset. The "goodwill that was generated on Friday has totally evaporated," said Bob Yawger, director of energy futures at Mizuho, referencing the brief period when Iran had reopened the Strait of Hormuz.
Shipping traffic through the Strait of Hormuz, a critical chokepoint for about one-fifth of the world's oil supply, has slowed to a near standstill. After more than 20 vessels transited the strait on Saturday, only three crossings were observed in the subsequent 12 hours, according to ship-tracking data.
The U.S. military confirmed its forces boarded the Touska after the ship, owned by a company accused of procuring materials for Iran's ballistic missile program, attempted to bypass the blockade. The action has thrown the future of a two-week ceasefire, set to expire Wednesday, into question.
Despite the recent price drop, some analysts see pathways for gold to rise regardless of the conflict's outcome. Markets are beginning to weigh the long-term consequences of the conflict on inflation and central bank policy. Standard Chartered forecasts the average gold price will fall to $4,605 per ounce in the second quarter before rising to $4,850 in the third.
According to an analysis from HSBC, an end to the conflict could prevent runaway inflation, allowing central banks to abandon rate-hike plans, which would support gold. Conversely, a prolonged conflict could damage the global economy, forcing central banks to introduce monetary stimulus, also creating a favorable environment for the precious metal.
"In the interim, we still expect gold's directional trade to take cues from broader risk sentiment, and this is highly dependent on how ceasefire talks pan out," said Christopher Wong, a strategist at OCBC.
Among other precious metals, spot silver fell 0.5 percent to $80.36 per ounce, while platinum was steady at $2,103.38.
This article is for informational purposes only and does not constitute investment advice.
