Precious metals on the London spot market displayed a weakening trend overnight, oscillating lower. Escalating geopolitical tensions, coupled with a surge in oil prices, have ignited inflation expectations, subsequently elevating the probability of a Federal Reserve rate hike.
Yemen's Houthi rebels launched attacks on Saudi energy infrastructure, combined with the ongoing geopolitical standoff in the Strait of Hormuz, propelling Brent crude oil to briefly surpass the $99 per barrel mark. As energy is a core component of inflation, the sharp rise in oil prices has sparked concerns about a potential rebound in inflation. The market is now repricing the likelihood of prolonged higher interest rates, which places short-term downward pressure on gold prices.
On the news front, Canada's C$20 billion in retaliatory tariffs against US goods took effect on Tuesday. Canadian officials stated they are not seeking to escalate the trade war but aim to accelerate the process of reducing dependence on the United States. Regarding geopolitical developments, amidst the escalating US-Iran conflict, the Houthi group launched a large-scale attack on energy facilities in southern Saudi Arabia, prompting Riyadh to shut down several energy installations.
On the central bank front, China's central bank reported gold reserves of 76.73 million ounces (approximately 2,386.57 tonnes) at the end of August, a monthly increase of 650,000 ounces (about 20.22 tonnes). This marks the 22nd consecutive month of gold purchases by the central bank. The probability of a Fed rate hike in September currently hovers around 60%, indicating that market sentiment remains divided. However, given the impact of the US-Iran conflict on oil prices and the hawkish stance of some Fed officials, the probability of a rate hike is likely to remain elevated.
Nevertheless, it is foreseeable that the number of rate hikes by the Fed within the year will be limited. Should the September FOMC meeting indeed result in a rate hike, it could be viewed as a "landing" event. For gold, this would mean short-term resistance to rebounds and increased volatility, yet the underlying trend of a rebound may remain unchanged.
Attention now turns to the upcoming US August PPI and CPI data, which are expected to provide strong guidance for the Fed's policy decisions and may lead to increased intraday volatility in the markets as investors react to the figures.