Gold started the week on a losing streak, shedding about 2% to trade at about $4,521 as tensions in the Gulf escalated and caused oil prices to climb. At the same time, the reserve currency appeal of the U.S. dollar increased and the USD index strengthened. This confluence of factors is weighing on gold and exerting drag on its potential to record price increases.
The current ceasefire between Iran and the U.S. is approaching its end and no progress has been made in talks between the warring parties. Additionally, President Trump announced Project Freedom, an initiative in which U.S. naval forces would escort commercial ships through the maritime chokepoint of the Strait of Hormuz that Iran had functionally closed back at the end of February when Israel and the U.S. launched attacks against the Gulf country.
In response to the forceful attempt to let vessels through the strait, Iran launched missile attacks against the UAE. These events have raised concerns about the conflict dragging on for a lot longer, and crude oil prices have risen in response.
As a result of these tensions, the dollar has appreciated and made it harder for non-dollar holders to buy gold. This has exerted downward pressure on bullion as its upside is hamstrung. Under normal circumstances, escalations in the Iran war would have caused gold to rally as investors seek out safe havens for their portfolios.
Further pressure on gold prices is coming from the U.S. Fed which is likely to keep rates higher as the inflationary impact of elevated oil prices plays out. Energy prices impact general economic activity, and the Fed is concerned that easing rates too soon could cause inflation to rise a lot faster than they would be able to keep a lid on.
This hawkish outlook is putting pressure on gold as investors opt for assets that offer a return, unlike gold which is non-yielding.
At the moment, the Middle East conflict and the effect it is having on oil prices is exerting a major influence on gold prices, especially given the attendant strengthening of the dollar each time hostilities escalate in the region. Investors are reacting to every new development in this conflict, and the upside potential of gold prices is being pressured as a result.
For entities like Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM) that take a longer-term view on market drivers, the current price fluctuations are just noise because the fundamental picture remains strongly bullish for gold.
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