As Friday trading got underway, gold extended its losses from the previous trading session amid concerns that energy-fueled inflation was likely to up the odds of an interest rate hike by the Federal Reserve in the last quarter of the year.
During trading on Thursday, gold prices slipped by about 2% in the wake of Brent crude climbing back above $100 per barrel after fighting between the U.S. and Iran intensified. The Houthis also struck two oil tankers in the Red Sea, making good on their threat to block Saudi Arabian shipping through this route. This escalation is putting at risk another vital chokepoint in global shipping.
In early trading on Friday, spot gold retreated by 0.4% and was priced at $4,030 an ounce. United States gold futures scheduled for delivery in August also dropped by the same margin to hit $4,033. Overall, gold was on course to make a modest weekly appreciation of 0.4% if trading in the later sessions of the day doesn’t wipe out these gains.
Commenting on bullion’s price movement, Brian Lan, the Managing Director of GoldSilver Central, said more volatility in gold’s price should be expected as has been the case over the past multiple weeks.
He added that each time gold slipped to about $4,000 or below this price level, big buyers entered the market and triggered a rally that lifted prices again.
The macroeconomic picture isn’t being helped by the rhetoric coming from Washington. On Thursday, Trump stated that the U.S. would deliver “major military punishment” to Iran and the Houthis after ships were attacked in the Red Sea. Such statements shrink the chances that a lasting peace deal will be negotiated soon enough.
In response to the Houthi attacks, oil markets reacted strongly. Brent crude spiked 7% to cross the $100-per-barrel price, reaching levels it had last traded at in May.
When oil prices rise this high, major concerns about inflation arise. Traditionally, gold thrives in environments characterized by high inflation. However, the current circumstances are having the opposite effect because when inflation is high, lending rates go up and drive investors into Treasuries and other assets that offer an interest-bearing return.
With the FOMC set to meet next week for its scheduled meeting, traders are anticipating that the Fed will keep the current rate but a hike could be on the cards in September if conditions don’t shift significantly.
Players in the precious metals ecosystem like Numa Numa Resources Inc. will be hoping economic and geopolitical conditions improve and gold regains its footing because once gold’s price stagnates or even retreats significantly, exploration and mining stocks linked to this metal also take a beating.
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