Gold rebounds as oil chaos, Fed rift spark fears of policy shock

Gold edged up from a three-week low on Thursday, though it remained under pressure as investors weighed a deeply divided Federal Reserve, a naval blockade of Iran that has sent oil prices surging, and the implications of both for the trajectory of US interest rates.

Spot gold rose 0.7% to $4,573 per ounce after slipping to its lowest since late March at $4,548 in the previous session, while US gold futures for June delivery gained 0.5% to $4,585.10 an ounce.

"Dip buying is playing a part in gold's recovery efforts today. Gold is representing a value proposition for traders at current levels," said Tim Waterer, chief market analyst at KCM Trade.

Oil surge complicates the picture

Elevated energy prices are capping bullion's near-term gains by reviving inflation concerns that could keep borrowing costs higher for longer.

Brent crude topped $124 a barrel on Thursday — its highest level since mid-2022 — extending a sharp rally that began when the US imposed a naval blockade on Iranian ports.

Prices had already surged above $118 a barrel on Wednesday alone.

The conflict between the US and Iran has strangled traffic through the Strait of Hormuz, a critical artery for global oil flows, with Tehran refusing to reopen the waterway until the blockade is lifted.

Negotiations to end the standoff have repeatedly stalled, with both sides entrenched.

President Donald Trump said the US would maintain its naval blockade until Iran agrees to a nuclear deal.

"The blockade is somewhat more effective than the bombing. They are choking like a stuffed pig, and it is going to be worse for them. They can't have a nuclear weapon," Trump told Axios on Wednesday.

A historic split at the Fed

The Federal Reserve held its benchmark funds rate steady in a range of 3.5% to 3.75% on Wednesday — its third consecutive hold — in what proved to be Jerome Powell's final meeting as chair before his term ends on 15 May.

But the decision was far from routine.

The vote split 8-4, the most divided Fed decision since October 1992.

Three dissenters — Fed presidents Beth Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lorie Logan of Dallas — objected not to the hold itself but to the retention of an easing bias in the statement, signalling they believed a rate hike was as likely as a cut.

A fourth dissenter, Governor Stephen Miran, called for a quarter-percentage-point reduction.

The Fed's statement acknowledged that "developments in the Middle East are contributing to a high level of uncertainty about the economic outlook" and that "inflation is elevated, in part reflecting the recent increase in global energy prices."

Powell, who confirmed he would remain on the Fed's board as a governor through January 2028 despite stepping down as chair, described the deliberations as "vigorous."

He noted that more committee members wanted the policy statement to communicate a "neutral stance, so that a hike is as likely as a cut."

Rate cuts priced out

Markets have moved swiftly to strip out expectations of near-term easing.

Traders are pricing out rate cuts entirely for this year, with markets assigning a meaningful probability of a hike by early 2027, according to interest-rate futures data.

For gold, which tends to benefit from lower real yields and a weaker dollar, the repricing represents a significant headwind.

Bullion's near-term price action will be shaped by the interplay of energy markets, any fresh signs of rising US inflation, and the trajectory of Fed policy under incoming chair Kevin Warsh, whose nomination was advanced by the Senate Banking Committee on Wednesday.