(March 26): Gold retreated as US President Donald Trump threatened Iran with intensified military action after Tehran rejected a push for peace talks, signalling that there will be no swift end to the nearly month-long war.
Bullion fell as much as 2.1% to dip below US$4,420 an ounce before paring some losses. Iran had “better get serious soon, before it is too late, because once that happens, there is NO TURNING BACK, and it won’t be pretty!” Trump posted on social media on Thursday. Iran’s state-owned Press TV said the country is seeking certain guarantees to end the conflict, including that the US and Israel won’t resume their attacks.
Since the war began nearly a month ago, gold has fallen more than 15%, moving largely in tandem with stocks and in an inverse relationship with oil. Spiking energy prices have raised the risk of inflation and led investors to bet that central banks will keep interest rates unchanged, or hike them. That’s a headwind for non-yielding bullion.
The prospect of a rate increase by the Federal Reserve may be moderated by the risk of an economic downturn in the US caused by a protracted war. Wall Street is cutting its forecasts for the American economy this year, boosting its projections for inflation and unemployment and nudging up the odds of a recession.
Oil advanced on Thursday after Trump’s warning. Iran’s parliament is starting work on a draft bill to impose a fee on vessels seeking safe passage through the Strait of Hormuz, the critical chokepoint for energy supplies that’s been effectively closed since the war began.
See also: Gold extends gains as reports of Iran war talks offer respite
Around 85 tonnes of gold holdings in exchange-traded funds have been redeemed since the war began, according to a Bloomberg calculation. Even at US$4,500 an ounce, a further 83 tonnes of holdings remain lossmaking and therefore vulnerable to liquidation, analysts from Standard Chartered plc including Sudakshina Unnikrishnan said in a note. That’s around US$12 billion based on gold’s closing price on Wednesday.
“Frothy positioning is likely to remain vulnerable in the near term,” the analysts said.
See also: Gold and silver rebound as Trump postpones Iran energy strikes
Some investors have been betting on price declines through options. with one spending more than US$100 million on puts for the largest gold-backed exchange traded fund earlier this week. A put option gives the buyer the right to sell at a pre-determined price, and are used by speculators to bet on downside, as well as by miners to lock in high prices.
The cost of buying puts relative to the cost of buying equivalent calls, which allow investors to profit from upside in prices, jumped to a six-year high this week.
Spot gold fell 1.5% to US$4,437.18 an ounce at 9.36am in New York. Silver fell 4.1% to US$68.28, while platinum and palladium also fell. The Bloomberg Dollar Spot Index edged higher.
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