Gold hits near 4-month low; experts flag growing downside risks

Gold prices fell by over 2% on Monday, hitting a low not seen in nearly four months.

The decline was driven by concerns about inflation, which were exacerbated by the intensifying conflict in the Middle East, leading to expectations of higher global interest rates.

Experts believe that the near-term risks to gold prices have increased even if long-term fundamentals remain intact.

The demand for safe-haven assets has been eclipsed by factors such as a strengthening dollar, elevated energy costs, and evolving expectations regarding interest rates.

Geopolitics, dollar strength, and liquidity

The COMEX gold contract fell to $4,355.60 per ounce earlier on Monday, its lowest level since January 2.

The contract was last trading 4.4% lower at $4,408.20 an ounce.

In an escalation of the three-week-old conflict, Iran announced on Sunday that it would target the energy and water infrastructure of its Gulf neighbors.

This statement was made in retaliation for a threat from US President Donald Trump delivered the previous day, which promised a strike on Iran's electricity grid within 48 hours.

Despite the ongoing Iran conflict, gold prices have dropped by approximately 14% since the fighting started.

This highlights that short-term price movements are still primarily driven by broader macro factors, such as interest rates, the strength of the US dollar, and positioning across various asset classes.

“This pattern is consistent with previous shock episodes, where liquidity needs tend to outweigh safe-haven demand in the early stages,” Ewa Manthey, commodities strategist at ING Group, said in a report.

Inflation, interest rates, and long-term gold view

Meanwhile, Asian shares declined while oil prices remained above $105 a barrel.

This movement is attributed to investors assessing potential threats by the US and Iran to target energy facilities.

The elevated crude prices, fueled by the closure of the Strait of Hormuz, are consequently driving up inflation through increased transport and manufacturing expenses.

Although rising inflation typically makes gold more attractive as a hedge, its appeal as a non-yielding asset is currently limited by high interest rates.

Concurrently, expectations for a US Federal Reserve interest rate hike this year have significantly increased.

According to the CME FedWatch tool, interest rate futures are now pricing in approximately a 27% probability of a rate hike by December, indicating that a rate increase is considered much more likely than a rate cut.

“The real turning point for gold will likely occur when the Federal Reserve’s 'hawkish hold' policy meets the reality of unanchored inflation,” John Murillo, chief business officer at B2BROKER, a global fintech solutions provider for financial institutions, said.

“If central banks hesitate to aggressively fight the rising cost of living, dismissing it once again as a transitory byproduct of the oil shock, gold will likely reignite its rally sooner rather than later.”

“For now, the shiny yellow metal is a 'buy-on-dip' play, waiting for the market to realize that with US national debt touching a $39 trillion milestone, fiat credibility is eroding faster than interest rates can absorb it,” Murillo added.

Among other precious metals, silver prices on COMEX were at $65.865 per ounce, down 6.1% from the previous close.