Gold slips below $5,000 on rate fears, but experts see long term gains

Gold dipped on Monday due to diminishing expectations for immediate US interest rate reductions, which were dampened by rising energy costs.

However, a weakening dollar served to mitigate the decline.

A slightly weaker dollar made commodities priced in the currency, like gold, less expensive for international buyers.

“The precious metal faces selling pressure as uncertainty surrounding the monetary policy announcement by major central banks this week is dominating the intense geopolitical conflict in the Middle East,” Lallalit Srijandorn, editor at FXStreet, said in a report.

The ongoing conflict in Iran has led to the price of gold falling, with levels briefly below $5,000 per ounce on Monday.

At the time of writing, the COMEX gold contract was at $5,018.56 per ounce, down 0.9%. The contract had fallen to $4,971.30 per ounce earlier in the session.

With the US-Israeli conflict against Iran entering its third week, oil prices have stayed above $100 a barrel.

This war has severely disrupted global supplies by threatening oil infrastructure and leading to the closure of the Strait of Hormuz.

The rise in crude prices exacerbates inflation by increasing production and transportation expenses.

Interest rate gloom and geopolitical tensions

Although gold is typically seen as a hedge against inflation, its attractiveness is currently diminished by high interest rates, which make yield-bearing assets more appealing to investors.

It is widely anticipated that the US Federal Reserve will maintain its current interest rates for the second consecutive meeting.

Other monetary policy decisions are expected later this week from several major central banks, including the Reserve Bank of Australia (RBA), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Bank of England (BoE), in addition to the Fed.

The RBA is the exception, as it is anticipated to raise interest rates again; all other central banks are projected to maintain rates at their current levels.

The US market is currently not fully pricing in even a 25 basis point interest rate cut by the Fed before the end of the year, a significant change from late February when the market anticipated 2½ such cuts.

“This is the main reason why the price of gold has come under pressure,” Thu Lan Nguyen, head of FX and commodity research at Commerzbank AG, said in a report.

Meanwhile, US President Donald Trump announced on Sunday that his administration is engaged in discussions with seven nations to bolster security in the Strait of Hormuz.

Trump also asserted that countries heavily dependent on oil from the Gulf region bear the responsibility for safeguarding the strait.

US forces targeted all military sites on Kharg Island, a vital Iranian oil export hub, over the weekend.

In response to this action, Iran has issued a threat to retaliate against any oil facilities in the region that are linked to the US.

Long-term outlook for gold

The current fragile economic climate risks being worsened by a sustained period of steady or restrictive monetary policy, according to a Kitco.com report.

Global government balance sheets are under mounting pressure from rising borrowing costs as sovereign debt reaches historic levels.

Furthermore, persistent geopolitical risks, including ongoing conflicts in the Middle East and strategic competition between major world powers, continue to destabilize international markets, according to the report.

Large institutional investors maintain a long-term perspective on gold, seeing it as a rare source of diversification.

Major asset managers have highlighted this view, arguing that the metal offers protection against the increasing structural risks facing both equities and bonds, despite current short-term risks.

“In other words, the current weakness in gold may be less about deteriorating fundamentals and more about timing,” Neils Christensen, editor at Kitco, said in the report.

“Short-term frustration may dominate the headlines today. But the forces building beneath the surface suggest gold’s longer-term rise is far from over.”