During Asian trading hours on Thursday, spot gold prices experienced a sharp and sudden decline. The latest developments between the United States and Iran spurred a jump in oil prices and a strengthening U.S. dollar, putting significant pressure on gold.
Spot gold fell to a low of $4,396.15 per ounce, marking an intraday drop of $60.
A Reuters report indicated that the U.S. military conducted a new strike against an Iranian military facility overnight, further escalating tensions as Washington and Tehran engage in negotiations aimed at ending a three-month-long conflict. In response, international oil prices rose approximately 2% in early Thursday trading.
A U.S. official informed Reuters that the American military launched a new strike targeting a facility believed to pose a threat to U.S. forces in the Middle East and commercial shipping in the Strait of Hormuz.
According to Iran's Tasnim news agency, citing a military source, U.S. forces opened fire in the area of Bandar-e Hormuz near the Strait of Hormuz, following a confrontation between Iran's Revolutionary Guard and a U.S. oil tanker attempting to pass through the strait. No casualties or damage have been reported so far.
Brent crude futures rose $1.90, or 2.02%, to $96.19 per barrel. The more actively traded August contract gained $1.64, or 1.78%, to $93.89 per barrel. The July contract is set to expire on Friday.
U.S. West Texas Intermediate (WTI) crude futures increased by $1.73, or 1.95%, to $90.41 per barrel.
In the previous session, both major benchmarks had fallen more than 5% to one-month lows, driven by market expectations that a U.S.-Iran deal could be reached to end the war and reopen the Strait of Hormuz.
The lack of a clear end to the Iran conflict has fueled expectations that monetary policy will remain tight to curb rising inflation, negatively impacting non-yielding assets like gold.
Gold prices had fallen 2.6% over the prior two trading sessions. Remarks from former U.S. President Donald Trump on Wednesday, expressing dissatisfaction with the negotiations with Iran, dampened market expectations for an imminent breakthrough.
Peter Grant, Vice President and Senior Metals Strategist at Zaner Metals, stated, "The Middle East situation remains the biggest driver. There was a degree of optimism in the market, but as the situation drags on, that optimism is fading." He added that the prolonged conflict is heightening inflation concerns.
For gold traders, the hope for a ceasefire alone is insufficient to alleviate their worries—high oil prices could sustain elevated inflation, forcing central banks to maintain higher interest rates for longer instead of cutting rates as many had anticipated before the Iran conflict. Gold typically underperforms in a high-interest-rate environment because it does not pay interest.
Ryan McKay, Senior Commodity Strategist at TD Securities, noted, "Even if a deal is reached today, inflation relief won't be immediate. Therefore, I believe the macro environment remains unfavorable for gold."
Since the Iran conflict erupted in late February, gold prices have declined by approximately 16%. The near-closure of the Strait of Hormuz has delivered an inflationary shock to the global economy, making central bankers cautious about lowering borrowing costs.
The market still anticipates that energy-driven inflation will prompt the Federal Reserve to implement a 25-basis-point rate hike by the end of this year. Although gold is often seen as a hedge against rising inflation, it tends to perform poorly when interest rates are high, as it offers no yield.
Investors are awaiting the release of the U.S. core Personal Consumption Expenditures (PCE) price index on Thursday for clues on the monetary policy path. This index is the Federal Reserve's preferred gauge of inflation.