During a geopolitical crisis like the one the world is facing now, it’s normal for safe-haven demand to increase. Usually, that means gold prices rise. But, despite the war in the Middle East, gold is set for its second consecutive week of declines. Some traders might be wondering when it will hit bottom so they can buy the dip, while others might be worried the trend could continue. And there is one important sign that gold could skyrocket again.
The price of the yellow metal is down about 6% since the war began, though there have been some ups and downs along the way. With the Swiss Franc closely tied (a quarter of the currency’s reserves are in gold), it, too, has been one of the major underperformers in Forex markets. By contrast, the dollar has surged by more than 2.1% over the last two weeks, one of the strongest gains in almost a year. US Treasury yields have risen, making the greenback even more attractive for investors amid the turmoil.
It’s Not Just the Dollar
Since gold is priced in dollars, a stronger dollar usually means gold falls. And that’s certainly a factor in the equation, but it’s by far not the only one. After all, the strong growth in the dollar is particularly notable given that even with everything going on, the Fed is still expected to cut rates at some point this year. Meanwhile, markets have since priced in rate hikes for both the BOE and the ECB. That’s a significant change from just two weeks ago when there was rampant speculation that the ECB would turn dovish next week.
Markets now price in around 50-50 chances that the Fed will cut by the end of the year, which is significantly more hawkish than the two rate cuts that were almost fully priced in just two weeks ago. Gold typically moves in the opposite direction to interest rates, and this shift in the Fed’s outlook explains a larger share of the move in gold. It means that beyond the short-term price fluctuations we’re having during the war, the market trend is expected to be long-term.
The Dollar’s Peculiar Strength
Up until the war broke out, the dollar’s general direction was downward. It was driven in part by trade policy uncertainty, which hasn’t gone away with the White House starting a Section 301 investigation into China on Friday. Overvalued stocks have led investors to leave the US in search of value. And White House pressure to lower interest rates also hurt the greenback.
But the US is also largely isolated economically from the war, and could actually benefit as it is a net petroleum exporter. Other major economies, such as Europe, China, Japan, and other Asian nations, are highly dependent on energy imports. And we’ve just had a stark reminder of just how unstable the world is around the largest source of energy. Meanwhile, the US is consolidating control in its hemisphere, which includes the world’s largest oil reserves in Venezuela. All of this means the dollar is the premier safe haven, and gold is on the back foot.
Can There Be a Rebound?
The concerns that drove the dollar down over the past year haven’t gone away. The US economy significantly underperformed in the first quarter of this year. And February’s dismal jobs number wasn’t really priced in by the market as it reacted to events in the Middle East.
This means that if the conflict in the Middle East were resolved, markets could see a fairly rapid and large reversal. The dollar could erase almost all of its gains, but gold could also recover most of its losses. As the war drags on, however, a quick resolution of the conflict becomes less likely, and the current market trends could solidify.
