How will gold be impacted by the Israel-Hamas tensions and interest rate hikes

11 Oct 2023

Gold Comex benchmark December futures contract rose over 2% in the two previous trading sessions after honouring the technical support zone of $1820 per ounce. The brewing Middle Eastern crisis fuelled uncertainty and drove the appeal of the safe-haven gold. Additionally, assumptions that the Fed might refrain from lifting the base rate in the November meeting has increased following recent dovish comments from several officials.

 

Currently, the three major factors impacting the yellow metal can be summed up as fluctuating future projections of US yields, their impact on US Dollar strength, and the budding political unrest in Israel.

 

Bullion investors are likely to gauge whether the Israel conflict is contained somehow or whether markets will have to endure another pain apart from the FED’s strong desire to curb inflation. The US dollars and Treasury yields are on the mend after new highs last week probably because the FED wouldn’t attempt to risk overtightening, on the back of such an uncertain backdrop. However, what would happen in the scenario that Iranian complicity in the matter is proven and the conflict expands to other Middle Eastern countries?

 

If the Middle-Eastern carnage continues there is a threat of the globe being at square one, just like in February 2022 when Russia attacked Ukraine. It would mean more inflationary pressures. Historically, it typically results in a higher oil price, a stronger Dollar, and elevated yields. These are a concoction that is bound to break even the most resolute position! Gold continues to remain a timeless investment that has weathered countless storms throughout history and will continue to remain the preferred investment choice against uncertainty, volatility, and inflation.

 

However, the yield curve keeps sending some signals that gold investors should not ignore! The FED’s official’s dovish tone last evening somewhat boosted the ailing investor confidence as the brewing Israel-Hamas conflict continues to be the key event on the radar.

 

The soaring US Dollar and elevated yield trajectory were the primary headwinds over bullion. Wars are inflationary and how far this outburst in the Middle East is going to impact oil prices and kick start a vicious circle of inflation and instigate the FED to counter with rate hikes, is going to eventually decide the direction for gold. For now, the bullion investors are likely to stay put and cautiously take positions especially when gold hovers around the key resistance zone of $1880 to $1900’s per ounce.

 

While, the FED officials recently sang the “no recession symphony” and boosted anticipation of a pause in the November meeting, ruling out even one 25 basis point hike by year-end wouldn’t be a good idea. The Federal Reserve may have paced out from aggressive hikes but considering the last pause as the FED’s pivot seems to be wishful thinking at this point. Going forward investors are advised to keep track of evolving FED projections which will significantly shape the fund flow movements in gold.

 

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