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(Bloomberg) — Gold advanced, recovering some of the losses in the previous session, as dip-buyers entered a market fraught with risk on the fifth day of war in the Middle East.
Bullion climbed as much as 2%, clawing back ground after a four-day winning streak ended Tuesday. Traders are balancing gold’s risk premium against a stronger dollar, with a gauge of the US currency rallying about 1.5% this week. Bond yields advanced and surging energy prices heightened the risk of widespread inflation.
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That prompted traders to scale back bets on monetary easing, while a broad selloff across equities on Tuesday forced some investors to liquidate their positions to meet margin calls elsewhere in their portfolios.
The gold market is experiencing a standard “portfolio risk-reduction move,” said Peter Kinsella, global head of forex strategy at Union Bancaire Privee, UBP SA. “It’s entirely consistent with what we have seen in previous conflicts.”
Underscoring a sharp pullback in bullish bets, money managers’ net long position in gold has fallen since late January to approach the lowest in a decade, according to data from the Commodity Futures Trading Commission. That relatively low level “should limit the extent of any down move” in gold, said Kinsella.
Bullion has rallied by almost a fifth this year — hitting an all-time high above $5,595 an ounce in late January — with demand supported by persistent geopolitical and trade tensions as well as concerns about the US Federal Reserve’s independence.
Markets remain on edge as the US-Israeli war on Iran reverberates across the region. Israel bombarded Tehran with a fresh wave of strikes on Tuesday, and hit a building in the city of Qom where Iranian clerics were meeting to elect a successor to Supreme Leader Ayatollah Ali Khamenei, Israel’s Kan News reported. Iran’s semi-official Mehr news agency said the building was attacked but wasn’t in use at the time.
“I think we will definitely see a recovery for gold,” said Kinsella, adding that longer-term drivers remain unchanged. “If anything, an inconclusive outcome to the war highlights ongoing geopolitical risks to a greater extent than before.”
Inflationary risks from surging energy prices, however, could limit bullion’s gains by forcing the Fed and its global peers to hold interest rates steady for longer, or even hike them. Traders have priced in 80% odds of more than one quarter-point rate cut by the Fed this year, after fully pricing in two cuts as recently as Friday. Higher borrowing costs are a headwind for precious metals, which don’t pay interest.
