Gold Prices Rebound as Dip-Buyers Enter Market Despite Strong Dollar
Gold advanced on Wednesday, recovering some of the losses from the previous session as dip-buyers entered a market fraught with risk on the fifth day of conflict in the Middle East. Bullion climbed as much as 2.3%, clawing back ground after a four-day winning streak ended on Tuesday.
Traders Balance Risk Premium Against Dollar Strength
Traders are carefully balancing gold's risk premium against a stronger U.S. dollar, with a gauge of the American currency rallying earlier in the week before edging slightly lower. The Middle East conflict's inflationary impact on energy prices has prompted traders to scale back bets on monetary easing—a retreat that would typically be bearish for bullion, which doesn't carry interest.
Meanwhile, a broad selloff across equities on Tuesday forced some gold investors to liquidate their positions to meet margin calls elsewhere in their portfolios. Gold's heavy loss on Tuesday "raised eyebrows, having initially benefited from safe haven demand," according to analysts at BMO Capital Markets including Helen Amos.
Analysts Note Forced Liquidation and Inflation Concerns
The pullback happened as "spiking treasury yields on inflation concerns, strong US dollar, and forced liquidation for balance sheet protection overpowered its safe haven characteristics," the BMO analysts wrote in a note. Underscoring a sharp pullback in bullish bets, money managers' net-long position in gold has fallen since late January to approach the lowest level in a decade, according to data from the Commodity Futures Trading Commission.
That relatively low level "should limit the extent of any down move" in gold, said Peter Kinsella, global head of forex strategy at Union Bancaire Privee, UBP SA. "I think we will definitely see a recovery for gold," Kinsella added, noting that longer-term drivers remain unchanged. "If anything, an inconclusive outcome to the war highlights ongoing geopolitical risks to a greater extent than before."
Gold's Remarkable Rally and Inflation Hedge Characteristics
Bullion has rallied by about one-fifth this year—hitting an all-time high above US$5,595 an ounce in late January—with demand supported by persistent geopolitical and trade tensions as well as concerns about the U.S. Federal Reserve's independence. Gold is sometimes seen as an inflation hedge, although the higher interest rates that accompany rising prices can sometimes weigh on bullion, as they did in 2022.
Inflationary risks from surging energy prices, however, could limit bullion's gains by forcing the Fed and its global peers to hold interest rates steady for longer, or even hike them. Traders have priced in a roughly 80% chance of more than one quarter-point rate cut by the Fed this year, after fully pricing in two cuts as recently as Friday.
The Metal as Hedge Against Economic Extremes
The metal is best described as a hedge against extremes, according to George Cheveley, portfolio manager at asset manager Ninety One. "If you've got high inflation, gold works. If you've got deflation, gold works. The worst thing for gold is a stable economic environment," Cheveley explained, highlighting the precious metal's unique position in investment portfolios during periods of economic uncertainty.
Despite the current challenges posed by dollar strength and shifting interest rate expectations, market participants continue to monitor gold's performance as a barometer of global economic anxiety and geopolitical tension.
