- Gold rises slightly Friday but heads for second weekly decline
- Brent crude surge above $100 dampens expectations for U.S. rate cuts
- Traders expect Federal Reserve to hold rates at March meeting
- India gold demand weakens while Chinese investors increase bullion buying
Gold prices made a limited rise on Friday but was on course to fall again in the second week in a row because the oil prices increased sharply and geopolitical tensions continued to dampen the prospects of the interest rates in the United States being lowered in the near future thus limiting the demand of the safe-haven metal.
Spot gold increased approximately 0.3 percent to gold 5,095.55 per ounce at the early trading of Friday and the U.S. gold futures contracts with the upcoming April delivery fell 0.1 percent to 5,100.20. Although the daily increase is minimal, bullion has dropped over 1 percent already in this week and the price dropped by over 3 percent since the rivalry in the Middle East worsened on February 28, says Reuters.
This is a slump that has occurred following a sharp rise in oil prices in the world due to the announcement of Iran that it would continue closing the strategic Strait of Hormuz, which has built tension on the world energy reserves. Brent crude rose to over 100 a barrel throughout the week, raising inflation concerns and making the future of global monetary policy more difficult.
"Gold is facing competing forces right now. Geopolitical tensions are supportive, but higher oil prices raise inflation expectations and push bond yields up, which tends to limit gold's upside," said Ole Hansen, head of commodity strategy at Saxo Bank.
The rise in the cost of energy is normally accompanied by a surge in inflation expectations and this diminishes the chances that central banks will ease the policy in a short period of time. U.S. treasury yields and currency movements have also affected market sentiment. The yields on the 10-year Treasury in the U.S. loosened a bit on Friday, thus constraining the losses incurred by the bullion due to the lack of interest in gold. A less yielding environment tends to enhance the relative attractiveness of holding gold over interest bearing assets.
Oil Shock Redefines Expectations of the Interest Rates
The decision to review the U.S. monetary policy is gaining momentum among investors following the upsurge in oil prices. According to data from the CME Group FedWatch tool, traders currently anticipate that the Federal Reserve will leave its benchmark rate fixed within the 3.5 percent to 3.75 percent at the close of its policy meeting that is scheduled to occur in March 18.
At the beginning of this year, it was estimated by many analysts that the rate would be cut multiple times in 2026 when inflation seemed to be slowing down. Nevertheless, the recent energy price surge has cast doubt on the fact that inflation may turn back to hyperdrive and this means that policymakers will have to keep financial conditions tight longer.
Tim Waterer, KCM Trade chief market analyst has pointed out the effect of the inflation concerns that are fueled by oil are countering the traditional safe-haven status of gold. Such concerns as inflation fears and doubt of the Federal Reserve to reduce interest rates in case high price of oil continues to hinder him, partly undermining the attractiveness of gold, he said.
Waterer further suggested that geopolitical environment is one factor that keeps the investors on the radar of gold. As there is still no clear indication of the length and extent of the conflict in the Middle East, I believe that gold will continue to be in the gold search list among investors as a hedging instrument.
"If energy prices remain elevated, it could delay the Federal Reserve's path toward policy easing, and that tends to cap rallies in gold because investors anticipate higher real yields," said Bart Melek, head of commodity strategies at TD Securities.
The increase in the cost of oil has already affected the financial markets. Reuters reported that world stocks dropped on Thursday, and bond yields rose because the investors were concerned that the cost of energy might drag consumer spending and the economy. These circumstances will result in a divided message to gold: a geopolitical uncertainty policy will increase demand, and an increase in yields and inflation anxiety will restrain profits.
Diversification in Physical Demand in Major Markets
The physical demand of gold has recorded opposite results in the large consumer markets. In India, the discounts in gold increased this week to the lowest point in almost ten years since the local demand was weak. Reuters reported. The dealers have been worried about paying import duties as retail buyers hold on to their purchases until prices level.
India is a large gold consumer in the world and change in demand in India can affect the world trade. The domestic prices are quite high and currency changes tend to burden the jewelry shopping especially during periods other than great purchasing times like the Akshaya Tritiya or wedding season. Should the Chinese demand in opposition, it has become stronger due to increased geopolitical risks.
The Chinese investors have been buying more of the bullion and gold backed financial instruments in order to hedge against market volatility and currency fluctuations. The Chinese investors through safe-haven purchase of gold has been a great support to gold in the past as the world is in a state of uncertainty. The purchases by the central bank are also a significant contributor to the gold market.
Various central banks of emerging markets in the recent years have been bulking their bullion reserves as a wider diversification strategy to ensure that they are not overly reliant on U.S. dollar.
The persistence of the official sector demand has contributed to the support of the prices of gold even at times of market stress. Other precious metals were also transported downward just like gold. According to the data of Reuters, Spot silver declined by an average of 1% and platinum and palladium declined by 1%.
Investors Wait on Major U.S. Inflation
People are now focusing on the future economic signs that might affect the future interest rates and precious metal trend. The investors are awaiting the U.S. Personal Consumption Expenditures (PCE) price index, which is the favorite inflation measure of the Federal Reserve and is held up until January.
In case the data reveals long-term inflationary pressure, it may result in the further undermining of expectations of policy easing, which may put pressure on the prices of gold. On the other hand, indicators of a leveling of the price increase may revive the speculation of further rate reductions and bullion.
The close attention also is given to the situation in the Middle East conflict and the possible consequences on the world energy supply channels, especially shipping via the Strait of Hormuz. The disruptions may still persist and keep oil prices high and extend volatility to the commodities and financial markets.
Until further notice, gold is between two warring sides: endemic geopolitical risk, which fuels the safe-haven demand, and increased inflation expectations driven by rising energy costs, which diminish the chances of the monetary policy easing in the near future.
