Gold slides as yields and geopolitics bite

(MENAFN- MENAFNEditorial) Gold has come under renewed pressure at the start of the new month, extending its pullback from the late-August highs as rising oil prices, higher bond yields and a stronger US dollar outweigh the traditional safe-haven appeal of escalating geopolitical tensions. After trading above $4,650 last week, bullion has fallen back towards $4,300, with Tuesday alone seeing spot prices lose more than 2%. Once again, the inflationary implications of the conflict have become the powerful driver. Higher oil prices are adding to concerns that inflation could remain elevated, adding further pressure on already rising global bond yields and strengthening expectations that the Federal Reserve may need to tighten monetary policy further. Right now, markets are pricing in a 70% chance of a 25bps hike this month. This environment makes it challenging for gold as rising Treasury yields increase the opportunity cost of holding a non-yielding asset, while the stronger dollar makes bullion more expensive for buyers using other currencies.

During some of this year's geopolitical uncertainty, investors have been willing to look through the inflationary consequences and focus on gold's role as a hedge against political, fiscal and economic risk. However, it is becoming more challenging to look through the rapid deterioration in the bond market at a time when Fed Chair Kevin Warsh's hawkish message at Jackson Hole had already put upward pressure on rate expectations. The latest oil shock has reinforced that move. As a result, geopolitical risk is currently working against gold through the rates channel rather than providing the straightforward safe-haven boost normally associated with heightened Middle East tensions. The speed of the correction also reflects the strength of the preceding rally. Gold gained around 10% during August and reached above $4,650 before momentum reversed sharply. Some profit-taking was therefore likely, but the subsequent break through important technical levels has accelerated the decline.

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