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(Bloomberg) — Gold fell after a weekend flare-up in Middle Eastern waters renewed inflation risks from an energy-supply shock and cast doubt over talks to end the war.
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Bullion dropped as much as 1.9%, before paring some of the loss to trade near $4,800 an ounce. President Donald Trump said the US Navy fired upon and seized an Iranian-flagged cargo ship, while Tehran warned that ships approaching the Strait of Hormuz would be treated as violating a ceasefire. Several vessels were forced to abandon crossings only hours after the Islamic Republic had said Friday that the key waterway was open.
The latest incidents have jeopardized prospects for potential peace talks in Islamabad before a fragile 14-day ceasefire expires on Tuesday. Trump said he saw a chance for a deal, while also renewing threats to destroy Iranian power plants and bridges. Tehran said there was no “clear prospect” for productive negotiations.
Oil and natural gas prices soared, having slumped in the previous session. US equity futures slipped and a gauge of the dollar rose as much as 0.3%, pressuring gold that’s priced in the US currency. Failure to achieve a lasting diplomatic agreement to end the war — now in its eighth week — has driven market volatility.
The early-morning selloff in gold “reflects a setback to risk sentiments following the geopolitical twist over the weekend,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. “But there are still lingering expectations that both sides are shoring up leverage ahead of the next meeting,” he said, adding that the direction of trade in the meantime would take its cue from broader risk sentiment.
The latest price action underscores a trend of buying into dips rather than rallies, Wong said, adding that he expected gold to trade within a near-term range of $4,700 to $4,900 an ounce.
The protracted Iran conflict has triggered an unprecedented energy-supply shock that has intensified inflationary pressures, making central banks more likely to hold interest rates steady or even raise them — a headwind for non-yielding bullion. Gold has lost around 9% since the war began at the end of February.
Investors will be watching the US Senate confirmation hearing for Kevin Warsh, who will face questions on Tuesday as Trump’s next pick to lead the Federal Reserve. Any sense that Warsh would push for monetary easing later this year would likely support bullion, while greater caution around inflation — and a reluctance to cut rates — would be negative for gold.
