As the week gets to the mid-point, spot gold has been trading in a tight range around $4,500 an ounce as a firmer dollar, elevated yields on Treasuries and a hawkish Fed exert a drag on prices of the precious metal.
The current war happening between the U.S. and Israel on the one hand and Iran on the other would have continued to lift gold prices since the precious metal thrives during turmoil. However, the brakes have been pumped on this expected surge by the USD which has strengthened during this time of the military conflict in the Middle East.
The dollar has gained strength partly because oil markets have been rattled by the closure of the Strait of Hormuz, causing crude prices to surge significantly. Because of this rise in oil prices, the U.S. is earning a lot more revenue from the oil it is exporting, which is improving its balance sheet. The global economic turbulence caused by the war has also boosted dollar demand as countries and investors rush to acquire dollars for their different needs.
It is against this backdrop favoring the dollar that buyers of gold who don’t hold USD are finding it more costly to acquire the precious metal since gold is usually priced in dollars. Fewer such buyers are acquiring the precious metal, weighing on prices.
To compound matters even more, another headwind in the form of higher yields on U.S. Treasuries is also exerting its influence on gold prices. Gold is non-yielding, so the higher yields on Treasuries are currently more attractive to investors since they prefer to put their money in assets that provide a real return.
The ongoing war has also stoked fears about rising inflation. These concerns have prompted the Fed to be more hawkish, and most traders and investors now expect only one rather than the two rate cuts that had been expected this year. Even that one rate cut is most likely to happen much later in the year rather than in the first half as had been projected. With interest rates staying higher for a lot longer, precious metal prices are coming under pressure since they thrive in low rate conditions.
While precious metal markets are currently experiencing a correction, the long-term prospects of these metals remain strongly bullish due to underlying structural drivers like de-dollarization and continuing accumulation by central banks. Those holding gold for long-term reasons aren’t being fazed by the shifting price movements, and enterprises like Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM) are certainly keeping their focus on the bigger picture rather than the current swings triggered by news headlines.
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