(May 21): Gold held a gain after the latest comments from US President Donald Trump refreshed optimism that the Middle East conflict might be nearing an end, easing bets on interest-rate hikes.
Bullion was little changed near US$4,540 an ounce, having risen 1.4% in the previous session. Trump said the US is in the “final stages” with Iran, even as both sides traded threats. The dollar and Treasury yields retreated on Wednesday, lifting gold as it’s priced in the US currency and pays no interest.
A potential end to the war and the reopening of the Strait of Hormuz would ease inflation concerns driven by high energy prices, in turn reducing expectations that global central banks will keep interest rates higher for longer. That would be positive for non-yielding bullion, which typically performs well in a lower-rate environment.
However, investor optimism has been moderated by the frequent swings in rhetoric from both sides in the conflict. Bullion is down about 14% since the war began in late February, while yields on 10-year Treasuries remain near their highest levels in about a year.
The minutes of the Federal Reserve’s latest policy meeting showed a majority of officials warned the US central bank would likely need to consider raising rates if inflation continued to run persistently above their target.
See also: Gold holds losses as Iran impasse keeps rate hike bets high
Gold has traded in a narrow range since falling sharply in the early days of the Middle East conflict, as investors weigh higher rates against the prospect of a high-inflation, low-growth scenario, which they argue should benefit gold.
“When the Strait of Hormuz situation eventually deescalates, the prevailing macro headwinds against gold will ease and the gold price will likely bottom out,” Citigroup Inc analysts including Kenny Hu said in a note. In the event of a much longer closure of the waterway, concern will shift to stagflation, when precious metals tend to perform well historically, they said.
Spot gold edged down 0.1% to U$4,538.03 an ounce at 12.58pm in Singapore. Silver slipped 0.2% to US$75.73 an ounce. Platinum and palladium traded lower. The Bloomberg Dollar Spot Index, a gauge of the US currency, added 0.1% after ending the previous session down 0.3%.
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