Gold Pulls Back as the Dollar Strengthens, US-Iran Talks Blow Up

Spot gold started the week with a pullback, losing 0.2% to trade at $4,740 per ounce. On Tuesday, the metal recovered slightly and started the day at $4,758. These losses came as the talks between the United States and Iran fell through over the weekend and the dollar regained its momentum.

In the wake of the failed talks, the U.S. announced it was initiating a naval blockade of all Iranian ports in order to exert pressure on Tehran to agree to a permanent deal that ends the turmoil in the Middle East. Iran vowed to conduct retaliatory actions against ports in the Gulf if the U.S. went ahead and blockaded Iranian ports.

Prices of crude oil surged again to surpass $100 a barrel as the situation in the Middle East showed no sign of returning to normal any time soon.

Elevated oil prices worsened the inflation outlook in the U.S. and around the world as high oil prices tend to have a knock-on effect on prices of other commodities. Expectations that the Fed would cut rates this year have consequently fallen from the prior 40% chance to 21%, Liputan6 says. When interest rates remain elevated, gold prices come under pressure because investors prefer to put their money in assets that yield a return. Gold is non-yielding.

The Fed rate will therefore be something to watch as it plays a significant role in determining the price direction of gold and other precious metals like silver and platinum.

While the ongoing conflict with Iran is a tailwind for safe-haven assets like gold, the countervailing factor of inflationary pressures on the global economy, and the U.S. economy in particular, is exerting downward pressure on gold at a time when its bullish movement would be happening like clockwork.

Sprott Asset Management strategist Paul Wong says the continued closure of the Strait of Hormuz will continue preventing markets from functioning normally. Payment disruptions and high energy prices will keep favoring safe havens like gold, but the resultant disruption to economic activity will serve as speed bumps to gold markets. At the moment, the safe-haven appeal of gold is in a tug of war with geopolitical forces that are putting economies under pressure.

Markets are therefore likely to respond instantly to news headlines as sentiment takes center stage over macro factors that normally influence markets. Stakeholders like Collective Mining Ltd. (NYSE American: CNL) (TSX: CNL) will therefore keep tracking any new developments on the global picture and especially in the Middle East to get pointers to what the near future holds.

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