Gold Approaches $4,000: Oil Rally Disrupts the Calculation
Gold prices fell 0.86% to $4,025.83 on the morning of July 16, as the slowdown in US inflation was not enough to support prices, while the oil rally revived concerns that the Fed may keep interest rates higher for longer.
Gold prices started the morning of July 16 with a decline, as rising oil for a fourth consecutive trading day reignited energy-driven inflation fears. Gold was trading at $4,025.83, down 0.86%. Considering the previous close of $4,060.61, the loss reached $34.78. Thus, a significant portion of the recovery seen after the US inflation data the previous day was given back.
However, investors are pricing in the new movement in the energy market rather than past month's data. If the oil rally spreads to transportation, production, food, and service costs, the sustainability of the recent disinflation trend could be questioned. Therefore, the support from soft inflation data was short-lived. Gold felt the pressure of the possibility that interest rates could remain higher for longer, rather than safe-haven demand.
Oil Rally Changes the Fed's Calculation
Brent and WTI crude oil extended their gains to a fourth day on concerns that conflicts between the US and Iran could disrupt energy supply and commercial passages through the Strait of Hormuz. The US continued its strikes on targets in Iran for a fifth day, while Washington stated that operations would intensify until attacks on commercial ships cease. The increased security risk around the strait led some shipping companies to delay passages or seek alternative routes.
Before the conflict, the Strait of Hormuz carried about one-fifth of global oil and gas flows. Therefore, any development affecting ship traffic, insurance costs, or loading schedules in the region quickly impacts oil prices. Persistent increases in energy costs could make it difficult for the Fed to ease policy based solely on current inflation data. The market is assessing whether the oil shock will be short-lived and whether price increases will pass through to core items.
Interest Rate Pressure Outweighs Safe Haven
Under normal conditions, tensions in the Middle East could increase gold demand. However, in the current pricing, the same tensions raise oil prices, working in the opposite direction through inflation and interest rate expectations. The view that the Fed will keep rates high for long maintains the yield advantage of US bonds. Rising bond yields increase the opportunity cost for gold, which offers no interest. If the dollar strengthens, the purchase cost for investors using other currencies also rises. Conversely, soft US data limiting the dollar may slow the pace of selling. Therefore, direction will be determined not only by geopolitical news but also by the combined picture of oil, bond yields, and the dollar.
Gold Market Watches Fed Messages
Fed Chairman Kevin Warsh reminded in his congressional testimony that they are determined to restore price stability and that they kept the policy rate steady at 3.50%-3.75% at the June meeting. Warsh said that artificial intelligence investments provide strong support to the economy, but the consequences on inflation and the labor market are being closely monitored. Fed Board Member Lisa Cook noted that although the latest consumer and producer price data came in below expectations, the Fed's tracked annual inflation indicator pointed to 3.7% in June. Cook stated that she is ready to act if disinflation signs are not seen soon. New York Fed President John Williams said that overall inflation is still significantly high at around 4%. Williams emphasized that the current monetary policy stance is appropriately positioned to return inflation to the 2% target. These messages indicate that the Fed will not make a rapid policy change based on a single soft data set. For gold, the determining factor will be whether the oil-driven pressure is seen as temporary or permanent.
Gram Price Will Be Determined by Two Forces
While the 0.86% decline in the ounce price creates downward pressure on domestic prices, the rise in the exchange rate may limit the loss. Therefore, the movement in the international market may not be fully reflected in the gram price. Domestically, the gram gold was bought at 6,097.58 lira and sold at 6,098.46 lira as of 05:35, down 0.70%. The buying price of a quarter gold was 9,932 lira, and the selling price was 10,018 lira. While the decline in the ounce price pulls down gram and quarter gold, the rise in USD/TRY limits the domestic loss from being more severe.
Which Data Will Be Monitored Today?
Later in the day, Brent and WTI oil prices, ship passages through the Strait of Hormuz, statements from the US and Iran, and messages from Fed officials will be followed. The direction of US bond yields and the dollar index will also be decisive for gold prices. If the oil rally continues and conflicts spread to energy infrastructure, inflation concerns may strengthen. A reduction in tensions, normalization of ship traffic, or a pullback in oil could ease interest rate pressure. The market's first test will be around the $4,000 level.
