Gold is ending this week trading at about $4,540 per ounce, a price range it has held for nearly a week. This comes as traders remain undecided regarding the Middle East war’s direction due to the mixed signals coming from both sides in the conflict.
It has therefore become hard for traders to have concrete ideas about the likely action of major central banks on benchmark interest rates in the near term.
Iran is putting together its response to the latest ceasefire proposal from Washington, a proposal that some sources say has watered down a number of contentious conditions that kept talks from progressing. This news suggests that progress could be made this time around and the conflict could soon come to an end, which would strengthen expectations for rate cuts by the Fed.
However, there were reports that Iran’s Supreme Leader had instructed that the country’s enriched uranium should under no circumstances be taken out of the country. Oil prices soared on this news and stoked inflation concerns.
Trump also revealed that he was against plans by Iran and Oman to levy tolls on ships transiting the Strait of Hormuz. This statement indicated that the two sides are still as divergent as they were in past weeks on many issues each side considers crucial to ending the war.
These developments have left gold traders unsure about peace prospects since some information coming through hints at the potential of a breakthrough while other statements show that the two sides are far from agreeing on the basics needed to permanently halt hostilities in the Gulf region.
If this impasse lasts longer, chances of rate hikes by the Fed and other central banks increase as the need to stop inflation from spiraling out of control takes center stage. If lending rates stay at current levels or even rise, bullion prices will come under intense pressure because investors will prefer to channel their money into assets that return a profit. Gold doesn’t, so high lending-rate environments exert downward pressure on the metal’s price.
Concerns about inflation have been a major lever controlling precious metal prices. When Israel and the U.S. attacked Iran towards the end of February, oil prices soared and gold tumbled. Under normal circumstances, gold would have rallied on the safe-haven appeal it acquires during times of war. However, prices slumped due to inflation concerns and the possibility of interest rates staying elevated or even being hiked to contain the rising inflation.
For now, players in the gold market, such as Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM), are keeping a close eye on any news about the talks between the U.S. and Iran in order to assess the near-term prospects of gold prices.
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