Gold prices surge toward $4,800: When "war risk" recedes, can recession fears ignite a second peak for gold?

Zhitong Finance APP noticed that gold prices have risen for the fourth consecutive trading day. Although market expectations for the Middle East war nearing its end have strengthened, traders are betting that the Federal Reserve may need to support a potential economic downturn through rate cuts.

On Wednesday, the gold price rose as much as 2.7%, coming close to $4,800 per ounce, before the increase narrowed somewhat. The Middle East war has disrupted global markets and led to supply disruptions in energy and other commodities, raising concerns about a surge in inflation—concerns that had at one point exceeded gold’s traditional appeal as a safe-haven asset.

As of the time of writing, spot gold is up 1.9%, to $4,758.57 per ounce. Silver is little changed, at $75.08. Platinum is slightly higher, while palladium is lower. The Bloomberg U.S. Dollar Spot Index, which measures the dollar exchange rate, is down 0.2%.

Bond traders are currently reducing bets that central banks will curb inflation risks sparked by the conflict through interest rate hikes, and instead are focusing on the impact of the war on economic growth. Federal Reserve Chair Jerome Powell said earlier this week that long-term inflation expectations remain stable. Falling interest rates are typically favorable for gold, which does not pay interest.

Morgan Stanley Private Bank Asia’s head of interest rate and FX strategy, Yuxuan Tang,
said: “When the market narrative shifts from inflation to growth risks, gold’s safe-haven appeal often reemerges.” She said: “We firmly believe that the Fed has limited room to raise rates in this cycle,” and will shift its focus to the tight labor market. Lower interest rates are a positive factor for non-yielding gold.

Investors will look for clues from remarks by U.S. President Trump to the nation regarding the Middle East conflict, now in its fifth week. According to a White House official, Trump will praise the success of its military actions in Iran during his speech in the Wednesday gold time slot and emphasize that the operation could be wrapped up within two to three weeks. The official shared details of the president’s address and said the speech will portray the U.S. as having already achieved or surpassed all military objectives.

With markets hoping the war will end soon, gold prices have returned to an upward trend

Trump has been vacillating between saying a solution is at hand and threatening to escalate military action. Iran has also put forward certain conditions to end the fighting, including jurisdiction over the Strait of Hormuz. Before the war began, this critical shipping route accounted for about one-fifth of the world’s oil and liquefied natural gas transport.

In addition, February’s retail sales topped economists’ expectations, and ADP Research Institute’s estimate of private-sector hiring for March also beat expectations. Federal Reserve policymakers cut rates three times last year due to signs of weakness in the labor market, but this weakness has since eased.

Despite a rebound over the past few days, gold’s nearly 12% decline in March was its worst month since October 2008.

David Higgins, trading chief at Merrion Gold, a bullion and coin dealer, said that in the first few days of gold’s plunge in March, retail purchases slowed because, amid an escalation of the Iran conflict, the gold price did not rise as much as clients expected—it left them confused.

“However, in the past week or so, things have become very busy again,” he said. “Retail buyers are not as affected by high interest rates as banks are; they are more focused on inflation.”

Goldman Sachs is one of the banks maintaining a bullish view on gold. In a report released on Tuesday, analysts Lina Thomas and
Daan Struyven kept their year-end target at $5,400 per ounce, citing continued central bank purchases and a forecast that the U.S. will cut rates another two times this year.