Gold Rallies 1.2% on US-Iran Agreement Despite Fed’s Hawkish Signals

Key Takeaways

• The precious metal advanced more than 1% following an interim peace agreement between the US and Iran
• The agreement ensures unimpeded passage through the Strait of Hormuz for a 60-day period
• The Federal Reserve maintained its benchmark rate at 3.50%-3.75% while indicating a potential increase by October
• Fed Chairman Kevin Warsh reaffirmed the central bank’s dedication to curbing inflation
• Dollar firmness and elevated rate projections are constraining gold’s rally potential

The precious metal advanced on Thursday following the signing of an interim peace accord between the United States and Iran, providing market participants with renewed incentive to return to the safe-haven asset after the previous day’s decline.

Spot gold increased approximately 1.2% to reach $4,307 per ounce. This rebound followed Wednesday’s 1.7% decline, when a firmer US dollar and climbing Treasury yields pressured valuations in the aftermath of the Federal Reserve’s most recent policy announcement.

Gold Aug 26 (GC=F)

The US-Iran accord was executed electronically on Wednesday night. The agreement comprises a 14-point memorandum that initiates a 60-day diplomatic window.

Based on the terms, Iran has committed to permitting toll-free transit through the Strait of Hormuz. Complete restoration of shipping traffic through this critical waterway is anticipated within 30 days.

This strait represents a vital corridor for international petroleum exports. Its reopening should alleviate energy supply anxieties that have contributed to inflationary pressures in recent months.

Oil prices declined following the announcement, as traders factored in additional supply returning to markets. Reduced energy expenses could gradually diminish inflationary pressures.

Central Bank Keeps Door Open for Rate Increase

The Federal Reserve held its benchmark rate steady at 3.50% to 3.75% on Wednesday. However, policymakers removed forward guidance language from their statement, and revised forecasts revealed that nine of 19 officials anticipate at least one rate hike in 2026.

Market participants are now fully anticipating a rate increase by October.

Fed Chairman Kevin Warsh adopted a resolute position on inflation during his inaugural meeting as chair. The central bank also elevated its inflation projections, prompting investors to scale back expectations for rate reductions.

Elevated interest rates typically work against gold. Since the metal generates no yield, it loses appeal relative to interest-bearing assets when rates climb.

Currency Strength Creates Additional Headwinds

The US Dollar Index ticked higher on Thursday after surging 0.6% during the prior session. A more robust dollar increases the cost of gold for international buyers, potentially dampening demand.

Christopher Wong, a strategist at Oversea-Chinese Banking Corp, noted that declining oil prices provide marginal support for gold. However, he emphasized that the Fed’s positioning “complicates the story” and warrants caution in the immediate term.

Ryan Mckay, senior commodity strategist at TD Securities, suggested the rate hike anticipation was already reflected in prices before Wednesday’s Fed announcement. He characterized the prevailing outlook for gold as bearish.

Silver advanced 1.3% to $68.78 per ounce. Platinum and palladium also posted gains. Copper futures on the London Metal Exchange retreated 0.9%.

Whether the Strait of Hormuz has actually reopened for shipping following the agreement’s signing remains uncertain at this time.

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