In the world of commodities, the price of gold often serves as a barometer for economic and geopolitical stability. Today, we delve into the factors influencing gold prices and why they might not soar as some might expect.
Gold's Recent Performance and Outlook
Gold prices have been on a rollercoaster ride, with a weekly decline of 3.7% to $4540 in the week ending May 15. The metal started the week weakly, dipping to a cycle low of $4480, but rebounded as news emerged of a potential temporary waiver of sanctions on Iran's oil. This development, reported by Iran's semi-official news agency Tasnim, sent gold prices up 1% to $4584 before doubts crept in, causing a retreat.
At the time of writing, gold was trading at $4547, a modest 0.2% gain, as the US dollar weakened slightly. The week ending May 15 saw gold prices tumble due to surging oil prices, a strong dollar, and rising yields.
Oil, Geopolitics, and Gold
The waiver of sanctions on Iran's oil is a key factor in the gold price equation. Doubts over this waiver emerged when Iran's Tasnim news agency reported that fundamental differences remained between Tehran and Washington. The US President, Donald Trump, added fuel to the fire by stating that Iran's new proposal was insufficient for a deal, citing a lack of detailed commitments over suspending uranium enrichment.
Drone attacks on a nuclear facility in the UAE further escalated tensions, with President Trump expressing frustration and warning that time was running out for Iran. Brent oil futures traded between $106.87 and $112 on Monday, with oil prices up 1.5% at $110.70.
Data Roundup and Market Sentiment
US housing market data provided a glimmer of hope, with the NAHB Housing Market Index coming in at 37, surpassing estimates. However, Chinese data was largely disappointing, with retail sales and industrial production falling short of expectations. The silver lining was a slowing decline in home prices, with new home prices dropping by 0.19% and resale home values decreasing by 0.23%.
Global gold ETF holdings stood at 98.78 MOz, down slightly year-to-date but up for the week. Registered COMEX gold inventory decreased by 0.12 MOz.
Money managers increased their bullish gold bets, with net-long positions rising to 100,627, the most bullish in eight weeks. Long-only positions also rose, while short-only positions fell to their lowest in six weeks.
Dollar, Yields, and Bond Markets
The US dollar index was trading 0.20% lower at 99.20, with two-year yields flat at 4.07% after an earlier rise to 4.10%. Ten-year yields hit a one-year high of 4.63% before flattening at 4.60%. Japan's ten-year yield reached 4% for the first time since 1999, and UK gilt yields surged to a 28-year high.
The government bond selloff gathered pace, driven by war-related inflation concerns. The US dollar index closed at 99.28, up 0.47% on May 15, with a weekly surge of 1.5%.
Upcoming Data and Events
Major US data releases this week include March TIC flows, FOMC minutes, housing starts, S&P Global US PMIs, and University of Michigan sentiment and inflation expectations. Eurozone and UK CPI and preliminary PMIs will also be closely watched, along with Japan's national CPI.
Fed Governor Waller will speak on the economic outlook at the Frankfurt School of Finance and Management on May 22, and investors will pay close attention to CPI data in the current environment.
Gold Price Outlook and Expert Insights
Gold has been trading as a risk asset since the Iran war began in February, with safe-haven bids taking a backseat to fading odds of a rate cut due to soaring oil prices. Investors now see a 50% probability of a Fed rate hike by year-end, with some assessing that it could come as early as March 2026.
In this scenario, unless oil prices come down due to concrete geopolitical developments, selling into rallies with strict stop-losses is advisable. A breach of support at $4480 could open the way to $4345, with resistance at $4610/$4670. However, a bullish USDINR poses a risk to short positions.
Personally, I think the key takeaway here is the intricate relationship between gold prices, oil, and geopolitical tensions. While gold is traditionally seen as a safe haven, its price action has been largely driven by risk assets and the prospect of rate cuts. In my opinion, the market's focus on oil prices and the Fed's rate hike trajectory will continue to limit gold's upside potential. From my perspective, a resolution to the Iran situation and a subsequent decline in oil prices could be the catalyst for a significant move in gold prices.
