President Donald Trump and the Iranian leadership have agreed to a pause in hostilities that will last 14 days. During this time, the parties intend to complete negotiations on a complete end to the war, which has already upended world markets. The news caused gold prices to soar and oil to fall below $100 a barrel.
Immediately after the truce was declared precious metal rose in price by 3.1%, exceeding $4,850 per ounce. This was a continuation of the previous growth of 1.2%. Trump said on his social media account that he agreed to suspend the bombing less than two hours before the expiration of the ultimatum, which threatened the destruction of Iran. The key condition for the pause was the resumption of shipping through the Strait of Hormuz. Iran responded by saying that safe passage through the strait was possible for the next two weeks.
Oil fell below the psychological level of $100 a barrel and the dollar weakened, which supported gold prices denominated in US currency. Stock indexes jumped more than 2%. Interestingly, since the outbreak of military conflict in the Middle East, gold has moved largely in step with equities as investors sold off the precious metal to cover losses elsewhere in the portfolio and its traditional role as a safe haven temporarily weakened.
Experts attribute the current growth to an adjustment in risk assessment. “Gold broke through the $4,800 level not because of a dramatic change in sentiment, but because the markets are pricing in a lower likelihood of a protracted crisis,” said Pepperstone Group strategist Ahmad Asiri. “However, the discount compared to pre-war prices is still significant.”
The war, now in its sixth week, has triggered a surge in energy prices and increased inflationary risks. This, in turn, forced central banks to reconsider plans to lower rates, and in the future, even allow them to rise. Bond traders expect the Federal Reserve to keep borrowing costs unchanged through the end of the year. For gold, which does not generate interest income, is a serious negative factor.
According to Asiri, gold will remain extremely sensitive to political events in the near future. The current truce provides a respite, but it is conditional and fragile. Any hint of disruption, especially around the situation in the Strait of Hormuz, will almost certainly return volatility and create downside risks.
Source: Bloomberg
Image: Bloomberg
