Gold (XAU/USD) fell to about $4,075 in early Asian trade on Thursday after US President Donald Trump said the ceasefire with Iran was “over” and threatened further action, including renewed bombing and a reimposed US naval blockade following tanker attacks in the Strait of Hormuz. The backdrop has revived concerns that higher energy costs could feed inflation and keep US interest rates elevated, a configuration that can weigh on a non-yielding asset such as bullion.
Rate expectations also shifted. Swap traders now price the probability of a hike at the next Federal Reserve meeting at above 30%, compared with less than 20% last Thursday, according to CME FedWatch. The minutes of the Fed’s 16–17 June meeting showed a few policymakers saw a case for raising rates, though the committee ultimately held policy steady; the record also pointed to mounting inflation concern as labour-market worries eased slightly. Separately, World Gold Council data show central banks added 1,136 tonnes of gold worth around $70bn to reserves in 2022, the largest annual purchase on record.
Market Outlook and Strategy Amid US-Iran Tensions
Given the renewed US-Iran tensions and the resulting inflation fears, we believe gold is entering a period of high volatility. The immediate pressure is downwards as the market prioritizes the threat of higher interest rates over gold’s traditional safe-haven appeal. We are positioning for this by initiating short-term bearish trades, anticipating the price could test lower support levels.
This situation reminds us of past cycles where hawkish central bank policy has overshadowed geopolitical risk, such as the early 1980s when aggressive Fed rate hikes caused gold prices to fall sharply. We are also watching the US Dollar Index, which has climbed back over 105, adding further pressure on the dollar-denominated metal. A stronger dollar makes gold more expensive for foreign buyers, typically dampening demand.
Risk Hedging and the Role of Central Bank Demand
However, we are not committing to a purely bearish outlook due to the unpredictability of the conflict. We are using options to manage this risk, specifically buying out-of-the-money call options to hedge against a sudden price spike if the situation escalates into open conflict. This allows us to profit from a potential decline while protecting ourselves from a rapid reversal.
We are also mindful that central bank demand remains a supportive factor, as institutions added a record 1,037 tonnes to reserves in 2023 and have continued strong purchases into 2024. This consistent buying provides a fundamental floor for the price, suggesting that any significant dips may be short-lived. Therefore, we will be strategic with our profit targets on any short positions.
