Gold price rises on Middle East tensions, dollar drop

Gold price rises as dollar weakens and Middle East concerns linger 

On Wednesday, gold prices approached record highs, increasing by 0.2% to $2,388.56 per ounce by 1138 GMT, driven by investor concerns over the potential escalation of the conflict in the Middle East and a weakening U.S. dollar.  

The rise saw the precious metal approach its all-time peak of $2,431.29. Meanwhile, U.S. gold futures saw a slight decline of 0.1%, settling at $2,404.90. 

Developments in the Middle East continue to command the attention of the markets — particularly on Israel's response to Iran’s recent drone and missile attacks — while the U.S. and its allies plan additional sanctions against Tehran. 

As gold is traditionally seen as a safe haven asset in times of geopolitical and economic instability, the gold price has surged close to16% this year, gaining over $500 since the October 7 Hamas attacks — the tipping point in the Middle East conflict. 

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Dollar index and 10-year Treasury yield ease, boosting gold appeal 

Despite a general lack of correlation with the U.S. dollar and Treasury yields in the current trend, gold prices still react to short-term shifts in these indicators. A decline in both the dollar index and 10-year Treasury yields has enhanced the appeal of dollar-denominated gold. 

On the macroeconomic front, several major brokerages have revised their forecasts for when the Federal Reserve (Fed) might begin cutting interest rates, now anticipating a start in September instead of June, in light of robust recent U.S. economic data and higher-than-expected inflation figures.  

Federal Reserve officials, including Chair Jerome Powell, recently backed away from providing any guidance on when rate cuts may start, saying instead that monetary policy will remain tight for an extended period.  

Markets.com Chief Market Analyst Neil Wilson summarised Powell’s remarks in his morning note on Wednesday, noting that the Federal Reserve’s higher-for-longer interest rate rhetoric appears to have returned: 

“Meanwhile, Federal Reserve Chair Jay Powell said that ‘it's likely to take longer than expected" for the FOMC to have confidence that inflation will return to target. That of course is after last week’s hotter-than-expected CPI inflation print. He said the Fed could keep rates steady for ‘as long as needed’ — so ‘higher for longer’ returns officially, pointing to a cautious Fed while the chances of a June interest rate cut are evaporating. He also said that 12-month core PCE was likely to be little changed at 2.8%”. 

In other metals, spot silver climbed 1.4% to $28.47 per ounce, while spot platinum edged up by 0.1% to $957.58. Palladium also increased by 1.2%, reaching $1,026.27 per ounce. 

Gold price forecast: Goldman Sachs sees yellow metal at $2,700 per ounce by year-end 

Investment bank Goldman Sachs recently revised its year-end gold price forecast upward from $2,300 to $2,700 per ounce, signaling strong confidence in a sustained bull market for the yellow metal.  

The firm points to gold's resilience following last week's unexpectedly high U.S. Consumer Price Index (CPI) figures as further evidence that the current bull run is not typical, driven less by standard macroeconomic factors. 

Even as expectations for Federal Reserve rate cuts fall, and amid robust economic growth and record highs in equity markets, the gold price has surged by 20% in just the past two months. This rally underscores the metal's unique market position and investor confidence in its continued value. 

“The traditional fair value of gold would connect the usual catalysts – real rates, growth expectations and the dollar – to flows and the price. None of those traditional factors adequately explain the velocity and scale of the gold price move so far this year. Yet that substantial residual from the traditional gold price model is neither a new feature nor a sign of overvaluation," Goldman Sachs said in a report on Monday. 

Since mid-2022, the primary drivers of the increase in gold prices have been tangible factors, including a marked uptick in gold purchases by emerging market central banks — the People’s Bank of China notably leads the way — and elevated retail buying in Asia. These trends continue to be supported by current macro policies and geopolitical developments, according to the Goldman Sachs report. 

Moreover, Federal Reserve rate cuts later this year could further enhance gold's prospects. The upcoming U.S. election cycle and fiscal setting could also elevate market risks and support the gold price, as per the investment bank’s analysis. 

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.