Singapore – Gold extended the biggest gain in six months as signs of progress in reopening the Strait of Hormuz eased energy-led pressure on the Federal Reserve to raise interest rates.
Bullion rose 1 per cent to US$4,347.90 an ounce as at 9.57am on Aug 6, after jumping 4.1 per cent in the previous session, the biggest rise since Feb 3.
Iran said it has reached agreement with Oman on a proposed shipping route through the strait, raising the prospect of some energy flows resuming through the critical waterway. Oil, meanwhile, held losses with Brent crude trading near US$79 a barrel, while West Texas Intermediate was around US$75 after losing 11 per cent in the week’s first three sessions.
The route would be temporary and remain active for “two to four months,” Iranian Deputy Foreign Minister Kazem Gharibabadi told domestic media, adding that “this understanding does not mean the full reopening” of the strait.
President Donald Trump said the US’s negotiations with Iran were ongoing and he will “see what happens,” adding he would prefer to make a deal with the Islamic Republic than end the war militarily.
Signs of progress in ending the more than five-month Iran wa has markets now fully pricing in only a single US rate increase by year-end, down from two as recently as last week.
Gold and interest rates tend to move in opposite directions. The precious metal pays no interest or dividend, so lower interest rates make yield-bearing assets like bonds and savings accounts less attractive, increasing the demand for gold.
Lower interest rates also tend to weaken the US dollar, making dollar-denominated gold less expensive for international buyers and often lowering its price. The Bloomberg Dollar Spot Index, a gauge of the US currency, edged lower after ending down 0.2 per cent on Aug 5.
However, Fed Governor Lisa Cook repeated on Aug 5 that she is ready to raise rates if inflation doesn’t slow, warning the central bank may not have the luxury of waiting before it returns to its 2 per cent target. Despite backing the decision to hold rates steady at the Fed’s July policy meeting, she cautioned that the longer inflation remained above the goal, the tougher it would be to rein it in.
Gold has fallen by nearly a fifth since the US-Iran war began in late February. The conflict sent energy prices soaring, stoked inflationary pressures and raised the likelihood that rates will stay higher for longer.
“Macro headwinds being pushed out on the horizon, along with US-Iran deal hope, have put some major wind in the precious metals’ sails,” TD Securities analysts including Ryan McKay wrote in a note. “Macro discretionary funds have more than doubled their positions since June,” they added, building on support from top funds on the Shanghai Futures Exchange and inflows to gold-backed exchange-traded funds in Asia.
However, gold’s challenge is not entirely over, the analysts said, noting: “A still extremely tight energy market will remain a major hurdle for a renewed bull run.”
Separately, the Bank of Korea announced it is working with domestic producers, the Korea Exchange and the Korea Securities Depository to establish a framework to purchase gold refined in South Korea. The move would mark the bank’s first purchase of domestically produced gold, which local producers would otherwise export, since 1967. BLOOMBERG
