Gold drops 1% as Mideast tensions rise, bearish trend returns

Bearish sentiments are back in play in the precious metals market as risks to the two-week ceasefire between the US and Iran increased.

Gold is poised for further decline, despite its recent increase, as the dollar experiences a significant surge in Asian trading on Monday, according to experts.

“A flight to safety remains a key theme, boosting the latter’s appeal as a safe-haven asset and the world’s reserve currency,” Dhwani Mehta, senior analyst at FXStreet, said in a report.

Concerns about US-Iran ceasefire

Concerns are growing in the markets regarding the sustainability of the fragile ceasefire agreement between the US and Iran, following the unsuccessful peace talks held in Pakistan over the weekend.

The collapse of negotiations prompted US President Donald Trump to threaten blockades in the Strait of Hormuz.

He also repeated his threats to strike Iranian civilian energy infrastructure.

Following the collapse of weekend negotiations aimed at ending the conflict with Iran, the US military announced on Monday its intention to initiate a blockade encompassing all maritime traffic entering and exiting Iranian ports and coastal regions.

Furthermore, in the wake of the failed talks, Trump and his advisors are reportedly considering limited military strikes within Iran, according to the Wall Street Journal.

Gold prices fall

Gold prices fell on Monday due to renewed Middle East conflict fears, which hiked oil prices, spurred inflation concerns, and lowered expectations for US Federal Reserve rate cuts this year after failed US-Iran talks.

At the time of writing, the COMEX gold contract was at $4,737.47 per ounce, down 1% from the previous close.

Meanwhile, the silver contract on COMEX was at $74.470 an ounce, down 2.6%.

The Revolutionary Guards of Iran issued a decisive and harsh warning, stating that any military vessels nearing the Strait of Hormuz would be viewed as a violation of the two-week ceasefire and would be met with severe action.

"With no US-Iran breakthrough over the weekend, ​the risk of a wider war is once again being priced in, threatening ​higher energy costs and a more aggressive Fed," said Zain Vawda, analyst at MarketPulse by OANDA.

Additionally, the rise of the dollar to a near one-week high has increased the cost of greenback-priced bullion for those holding other currencies.

Despite its traditional role as a hedge against geopolitical risk and inflation, spot gold has dropped over 10% since the US-Israeli war on Iran began on February 28.

High interest rates are currently suppressing the price of the non-yielding metal.

The probability of the US Federal Reserve implementing at least a 25 basis point rate cut at its December meeting has decreased to 16%, according to CME's FedWatch Tool, down from 21% the previous day.

With a limited amount of significant US economic data, market attention is shifting back to the status of the US-Iran ceasefire and the potential for a resumption of US military action in Iran, she added.

Technical outlook

Gold maintains a bearish outlook, indicated by the 21-day Simple Moving Average (SMA) crossing below the 100-day SMA ($4,674 pierced $4,687), Mehta said. 

Confirmation of this "Bear Cross" is pending a daily close. Further suggesting potential downside, the 14-day Relative Strength Index (RSI) is positioned below the midline, currently near 47.

On the downside, immediate support is concentrated in the demand area defined by the 21-day SMA at approximately $4,674 and the 100-day SMA near $4,687 as mentioned above. 

Should a deeper correction occur, a pullback to the 200-day SMA, situated around $4,186, is anticipated to draw in more strategic dip-buying interest, according to Mehta.