Gold suffered one of its sharpest single-day drops in recent memory on Thursday, as investors weighed the risk of prolonged high interest rates against a widening conflict between Israel and Iran.
BREAKING: Spot gold extends its selloff to -$400/oz on the day, now trading at $4,500/oz for the first time since February 2nd. pic.twitter.com/ARqkGaABpz
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Continuous gold futures fell more than 7% to $4,558 an ounce in early trading, a drop of $289. Spot gold was down 4.3% to $4,609.02 an ounce by 8:36 AM ET. Silver futures fell 9.3%, with spot silver down 11% to $67.17 an ounce.
The selloff pushed gold well below the $5,000-per-ounce level it had held for nearly a month.
The Federal Reserve left interest rates unchanged Wednesday, keeping them in the 3.5%–3.75% range. Chair Jerome Powell pointed to growing inflation risks and suggested there would be “a meaningful amount of movement toward fewer cuts.”
Strong U.S. producer inflation data released Wednesday added to the pressure. Markets responded by pushing back their expectations for rate cuts to September at the earliest, according to CME FedWatch data.
Gold is a non-yielding asset, meaning it tends to lose appeal when rates stay high. Investors often shift toward interest-bearing assets instead.
“Fed rate cuts have been pushed out further in the future,” said Adrian Ash, a researcher at BullionVault. “Mechanically, that would be bad for gold.”
Ash called the current moment a “test” for gold, but stopped short of calling it a price bottom.
The price drop in gold came alongside a sharp rise in oil prices. Brent crude futures jumped 6.3% after Iran struck key energy infrastructure across the Middle East overnight.
The conflict escalated Wednesday when Israel attacked South Pars, the world’s largest gas field. Iran responded with strikes on multiple energy facilities in the region and continued attacking targets in Israel.
The Strait of Hormuz, a critical shipping lane for global oil and gas, has been effectively closed, putting further upward pressure on energy prices.
Higher oil prices are seen as inflationary, which further reduces the likelihood of near-term Fed rate cuts.
OCBC analysts wrote in a note: “The market is effectively trading less on geopolitical hedging demand and more on the worries of higher inflation risks delaying Fed cut trajectory.”
They added that safe-haven flows into gold are “being offset by the drag from rising real yields.”
Precious metal mining stocks also fell in premarket trading. Freeport-McMoRan dropped 4.4%, Newmont fell 7.6%, and Royal Gold was down 4.6%.
The U.S. dollar strengthened on the back of the higher-for-longer rate outlook, adding further headwinds for gold, which is priced in dollars.
CME FedWatch data showed traders pricing in no rate cuts until at least September, later than previously expected.
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