(MENAFN- Investor Ideas) Gold's correction continues for the third day in a row, declining by more than 1% today, after reaching its highest record levels at $2,484 per ounce previously this week.
The continued declines in gold come with the recovery of the dollar, despite the continued high sentiment about the possibility of an interest rate cut in September, in addition to the underlying geopolitical factors, especially from the Middle East, which are preparing to ignite in light of a number of recent developments.
The US dollar was able to recover against the major currencies with the unexpected acceleration of factory activities in Philadelphia and the statement of the Federal Reserve Governor in San Francisco about the need for more confidence that inflation is actually moving towards its target. These factors came in conjunction with the dollar index enjoying a push from a major support area at the 104 level.
While the probability of the Fed reducing interest rates starting next September is still very high and amounts to more than 90%, according to the CME FedWatch Tool.
In fact, there are many factors that may have a double impact on gold prices. Despite the high hope of an interest rate cut by the Federal Reserve this year, the near certainty of that in September, and the high geopolitical concerns, concerns about the upward risks of inflation are still on the mind, and this may threaten gold's ability to maintain its gains, or at least slow them.
The underlying upside risks to inflation come from concerns about structural changes in policies in the US with the potential return of Donald Trump to the White House. This likely return of Trump would lead to inflation rising again with lower taxes and a massive increase in customs tariffs on imported goods, especially from China. This, in turn, will lead to higher prices and an increase in the deficit as a result of declining tax revenues, and this may prompt an increase in debt financing, which will result in higher bond yields, and this may harm gold.
On the other hand, the possible return of Trump may in turn raise political and economic uncertainty in the United States and the world, according to what the International Monetary Fund reported earlier this week. This, in turn, will be supportive of the yellow metal.
On the geopolitical front, the course of the raging war in the Middle East does not seem to be taking a direction other than further escalation, which may ultimately drag the entire region into chaos. This constitutes the most important factors that keep the yellow metal shining as the top safe haven in times of crises.
The Wall Street Journal reported that health centers, emergency services, and shelters in Israel were on alert in anticipation of the ignition of the southern Lebanese front, which could lead to the fall of 4,000 missiles in one day, drowning the air defense systems. The Journal quoted the director of an emergency response organization in Israel as saying that this war might ignite the entire Middle East.
Meanwhile, this comes with what appears to be a stagnation in the negotiating track regarding the war in Gaza, which, if completed, would defuse the war whose borders we do not know, which will start from southern Lebanon. Let us not forget that Hezbollah's diverse arsenal will be able to confuse the Israeli forces more than any of the previous wars, especially after the exhaustion it suffered in Gaza, and this is what may push it to drag the United States into the region.
To fuel this escalation and discourage the negotiating process, the Israeli Minister of National Security from the far right entered the courtyard of Al-Aqsa Mosque yesterday. This step was condemned even from within Israel, such as the Minister of the Interior, who described the visit as "provocative," according to what was reported by The Washington Post. These repeated visits - with a political goal - by the extremist minister, in my opinion, were among the key factors that led us to where we are in Gaza, due to the religious status that Al-Aqsa Mosque represents for the Palestinians. With each repeat of these visits, peace may become more distant from the entire region. We should not forget that this minister is the most opposition of any agreement that leads to an end to the war in Gaza, and therefore the specter of regional war will remain in our minds.
While Israel may deliberately delay negotiations until Trump returns to the White House. This is because his return may be a benefit for the Israeli Prime Minister to keep the war raging until the following year, as Trump had previously spoken that Israel should "do what you have to do", according to The New York Times.
In light of all this, it seems that the outbreak of a widespread regional war is only a matter of time, and this is what provides continued support for gold. Let us not forget that the outbreak of war in Gaza has lifted gold from the bottom of $1,800 per ounce last October.
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