Gold: Rising Fed risks raise pullback potential – Commerzbank

Commerzbank’s Thu Lan Nguyen notes that Gold briefly slipped below USD 4,500 per ounce as markets priced a prolonged Iran conflict and sharply higher US rate expectations. With Fed cuts largely priced out and even hikes being discussed after strong producer prices and hawkish minutes, the bank sees growing potential for a setback in Gold if Middle East tensions escalate again.

Higher rate expectations weigh on bullion

"The price of gold briefly fell below the USD 4,500 per troy ounce mark late last week after the market once again began to price in a prolonged conflict with Iran. A key factor weighing on the market was that interest rate expectations for the US were revised significantly higher."

"Before the outbreak of the war, interest rate cuts by the US Federal Reserve had been anticipated for this year. However, these expectations have largely been priced out of the market in recent weeks. Most recently, there has even been a shift toward the possibility of interest rate hikes."

"These expectations were also fueled by a surprisingly sharp rise in US producer prices in April, which suggests a stronger surge in inflation than previously assumed."

"In addition, the minutes of the last Fed meeting revealed that a majority on the Open Market Committee warned that interest rate hikes would have to be considered should inflation remain above the 2% target."

"With this reassessment of Fed policy, the potential for a setback for gold is now rising in the event of a renewed escalation of the crisis in the Middle East."