Gold Weakens as Energy Inflation Risks Rise Again
Gold prices weakened on Tuesday (May 26) after a US attack near the Strait of Hormuz dampened optimism that talks to reopen the critical waterway would soon yield a breakthrough. The renewed tensions kept the risk of energy-based inflation high, limiting gold's appeal amid expectations of still-tight interest rates.
Bullion briefly fell as much as 1.1% and moved just above US$4,500 per ounce. Spot gold fell 1% to US$4,523.43 per ounce at 10:08 a.m. London time. Silver also fell 2.6% to US$76.05, while platinum and palladium also fell.
The main trigger came from a limited escalation on the ground. US Central Command (CENTCOM) stated that its forces attacked missile launch sites and ships suspected of attempting to lay mines. Washington asserted the strikes were defensive in nature to protect US forces, but the market believed the move could disrupt diplomatic momentum that had previously been seen as improving.
At the same time, Brent rose more than 3%, emphasizing the return of the supply risk premium as shipping lanes remain effectively closed and vulnerable to disruptions. This oil rally is a channel of pressure for gold: higher energy costs have the potential to keep inflation high and reinforce expectations of tight interest rates, thus pressuring non-yielding assets like gold.
On the currency side, the Bloomberg Dollar Spot Index rose 0.1% after falling 0.3% the previous day, adding to the drag on gold. The combination of a slightly stronger dollar and rising oil prices narrows the recovery potential for bullion, although gold still serves as a hedge against heightened geopolitical risks.
Since the conflict broke out in late February, gold is said to have fallen around 14% as markets increased bets on interest rate hikes as the energy boom fueled inflation concerns. The World Gold Council believes that a sustained recovery in gold requires a "break" of its correlation with risk assets, and a more solid recovery may only be seen towards the end of the year, given that normalization of the energy balance will take time even if the conflict subsides.
The market's next focus will be developments in the Hormuz resumption negotiations, the direction of oil prices post-escalation, and changes in interest rate expectations derived from the dynamics of energy inflation and dollar movements. (Arl)*
Source: Newsmaker.id
