(BFM Bourse) – Gold has taken a sharp nosedive since the escalation of the conflict in Iran, due to the rise of the dollar, expectations of rate hikes, and the fear that central banks may sell off their stocks. But analysts agree that this rough patch is likely temporary.
Considered the ultimate safe haven asset, gold has plunged since the outbreak of the conflict in Iran. The precious metal, dubbed the barbarous relic by the renowned economist John Maynard Keynes, has seen its value drop by 15% since the start of the Middle East war.
This may seem paradoxical as geopolitical tensions usually tend to support the precious metal on the markets.
“The conflict in the Middle East has in the short term caused a rise in oil prices and, by extension, inflation fears. This has led to a strengthening of the US dollar and raised concerns about potential interest rate hikes – two factors impacting the price of gold,” explains UBS.
A stronger dollar makes gold, whose prices are denominated in US currency, less attractive for investors who do not use the greenback as their reference currency, all else being equal.
Rise in rates and margin calls
Expectations about interest rates from major central banks are another major negative impact on gold. The precious metal does not generate income (unlike bonds with coupons or stocks with dividends). Consequently, its value is penalized by interest rate hikes as it becomes more attractive to invest in gold rather than to hold onto it.
Investors have recently revised their forecasts on the future monetary policy decisions of the US Federal Reserve (Fed).
While a few days ago, market operators were expecting several interest rate cuts from the US central bank, the scenario has changed. According to data from the Fedwatch tool of the CME Group, investors now assign a probability of a little over 50% (51.9%) to at least one rate hike by the end of the year.
This reversal is due to the persistent rise in oil prices, with the market fearing that inflation will increase for several months, forcing central banks to raise interest rates.
“The market is being caught up by a more constraining macroeconomic reality: the rise in oil prices and the strength of the dollar mechanically activate inflation expectations, complicating the trajectory for central banks,” explains Antoine Andreani from XTB Research.
Another more technical phenomenon is occurring. Gold is dropping because market operators need to free up cash to cover losses on certain positions. Including margin calls, which require investors to provide funds to continue meeting risk requirements for a position.
“Gold has been greatly appreciated for years, some investment funds or speculative funds may be inclined to reduce some of their positions in this asset to generate liquidity (margin) to cover positions in stocks, for example, which have been much more volatile since the start of the conflict in Iran,” explains Alexandre Baradez from IG Markets.
Some financial intermediaries also mention the possibility that central banks may sell gold or slow down their gold purchases.
“It is likely that some central banks sell gold to defend their currency and/or to finance their energy purchases,” said Bernard Dahdah, an analyst at Natixis, to Bloomberg this week.
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[Context: The article discusses the factors contributing to the recent decline in gold prices, including the conflict in Iran, the impact of interest rate changes, and the potential actions of central banks. It also explores the potential long-term outlook for gold prices and the factors that could support a rebound.]
