Gold prices fell as traders increased bets on Federal Reserve monetary tightening following comments from Governor Christopher Waller. Waller indicated that the Iran war's energy shock could drive inflation, prompting speculation of a rate hike.
Bullion dropped by as much as 1.1% as bond yields and the dollar rose. Waller expressed support for signaling that the central bank's next interest-rate move could be an increase or a cut, as the energy shock from the Iran war raises prices. Traders have now fully priced in a quarter-point rate hike by December for the first time, as higher rates typically weigh on gold, which pays no interest.
Waller stated his current stance is to be patient in holding rates until the war's impact becomes clearer, but he cautioned that he wouldn't rule out a future hike if inflation doesn't start to slow soon.
Meanwhile, US consumer sentiment fell in May to a record low, and long-term inflation expectations worsened notably due to the Middle East conflict. The University of Michigan's final May sentiment index declined to 44.8 from 49.8 in April. The data also showed consumers expect prices to rise an annualized 3.9% over the next five to 10 years, up from 3.5% in April and the highest in seven months.
Bullion has traded within a fairly narrow range since falling sharply in the early days of the Iran war, as investors weigh higher rates against the prospect of a high-inflation, low-growth scenario. Bullion is down about 15% since the conflict began in late February.
Spot gold fell 0.8% to $4,506.87 an ounce as of 10:45 a.m. in New York. Silver declined 1.5% to $75.56 an ounce. Platinum and palladium also fell, while the Bloomberg Dollar Spot Index, a gauge of the US currency, rose 0.1%.
Background
The Federal Reserve's monetary policy decisions are crucial in managing inflation and economic stability, especially amid geopolitical tensions like the Iran war. Gold, often seen as a safe-haven asset, is sensitive to interest rate changes, which can affect its attractiveness to investors.
As the Federal Reserve navigates the economic impacts of the Iran war, market participants will closely monitor inflation trends and the central bank's policy signals. The potential for further rate hikes remains a key focus for investors.
