Gold gains further support as inflation slows faster than expected amid military escalation in Ukraine and the Middle East
Today's market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com
July 11, 2024 (Investorideas.com Newswire) Gold continues to advance for the third day in a row and exceeds the level of $2,400 per ounce in spot contracts, as well as for COMEX's futures.
Gold's gains come amid more optimism about the possibility of cutting interest rates in the US after a faster-than-expected slowdown in inflation. While the escalation of military actions in the Middle East and Ukraine comes to provide support for the yellow metal to maintain its gains.
Consumer Price Index (CPI) inflation slowed from 3.3% to 3% in June, versus expectations for it to decline to 3.1%. On a monthly basis, prices unexpectedly contracted by 0.1% for the first time since 2022. This came under pressure from a 2% decline in energy prices, including gasoline prices which fell by 3.8%, on a monthly basis.
This decline in inflation has led to more hope that the Federal Reserve will cut interest rates next September. This hope has reached the highest levels since attention was drawn to this month as the starting point towards a less tightening path for monetary policy. The probability that the Fed will cut rates by 25 basis points is more than 76% in September, according to the CME FedWatch Tool.
This slowdown in inflation has also put pressure on bond yields to decline significantly and has brought the real yields on 10-year Treasury bonds to the lowest level since the beginning of June at 1.197%, which may also enhance gold's gains.
On the geopolitical side, the conflicts in Ukraine or the Middle East do not appear to be on a path other than escalating further, and this is what may preserve gold's luster as a safe haven.
The details are many, but I believe that in the end they only serve the narrative of continued escalation more and more on various fronts.
In Gaza, it seems that the military operations there are heading to a new round, especially in the north, with leaflets being dropped warning of further escalation. This also comes with the cancellation of restrictions on the delivery of 500-pound bomb shipments from the US that were imposed last May, according to The Wall Street Journal.
Whereas the abolition of these restrictions comes after a series of large-scale operations in Rafah, which led to waves of condemnation from the international community, regarding the civilian victims there. But now, with the lifting of restrictions - with the exception of those on 2000-pound bombs - it suggests that the US is not doing what is necessary to put pressure toward stopping the escalation.
The trend of military operations expanding again in Gaza, in conjunction with the lack of progress on the negotiating track - at least what appears to be public - keeps the fuse on the South Lebanon front burning. This comes with the Israeli side's insistence on continuing military operations until its goals are achieved, which is to completely eliminate Hamas' military capabilities in response to the demands of the extreme right. This does not seem realistic to the military command there, nor even to the US.
On the other hand, David Ignatius spoke in an opinion article in The Washington Post, citing sources from US officials, that the parties to the conflict have agreed on the "framework" and are negotiating the details. While Ignatius conveyed officials' concerns that this progress does not mean that reaching a final agreement is imminent.
In fact, negotiations have faltered in the past, despite some progress achieved at the time, after which we saw to waves of escalation greater than before. We also do not forget the pressure exerted by the Israeli far right to obstruct such an agreement, in addition to the procrastination that Benjamin Netanyahu may undertake until the expected return of Donald Trump to the White House, in a bet that he will free Israel's hand in the region without any rebuke.
This prolongation of the war, as I mentioned, will maintain fears of a flare-up on the southern Lebanese front, and this time it may be on a larger scale than what we witnessed in 2006, whether on the part of the parties that will be drawn into the conflict directly or on the level of Hezbollah's military capabilities.
The outbreak of a full-scale war there threatens to drag Yemen, Syria, Iraq, and Iran deeper into this conflict, and this may ultimately threaten global supply chains passing through the Red Sea or even the Gulf of Oman. In addition, a report in The Washington Post talked about the development of Hezbollah's arsenal of guided and unguided munitions, which may carry explosive warheads weighing from 20 to more than 1,100 pounds, with a range that may reach more than 180 miles, and air defenses that can target aircraft - UAV at least - at an altitude of 90,000 feet, in addition to coastal defense systems. This arsenal, accumulated over decades, can target the Israeli depths, even in Tel Aviv, and may threaten its gas fields in the Mediterranean. Therefore, the potential war will not be limited at all, and this may push Israel to drag the US directly into this conflict, even if the latter refrains from doing so currently.
Not far from the Middle East, the war in Ukraine is preparing to take a new turn of unprecedented escalation. Some NATO countries are preparing to provide the first batches of F-16 aircraft to Ukraine. While this type of support is considered a bypass of the red line drawn by Russia, that may respond to this step with more unprecedented escalation. While donor countries may impose restrictions on the ground missions that these aircraft may carry out, like prohibiting them from striking the Russian interior, and limit their missions to short-range air defense only, according to The Wall Street Journal.
During the past weeks, Ukraine has targeted Russia with advanced munitions provided to it by the US, and this was a red line as well. This is what prompted Russia to mount an unprecedented escalation and Vladimir Putin's statement that he is ready to cooperate with any party, whether internationally recognized or not, to confront his enemies, in addition to a series of strikes that caused Ukraine to lose half of its ability to generate electricity.
As for the political side in the Eurozone, a state of uncertainty prevails, especially after the results of the French parliamentary elections, which resulted in a reality of extreme polarization between contradictory parties.
The political uncertainty there would keep the region's bond yields - French in particular - maintaining their upward trend, and this may preserve the euro some of its strength against the dollar, which may continue to decline, and this, in turn, will be in favor of gold as well.
While the Dollar Index is at its lowest levels in more than a month at 104.2 points, due to the continued hope of the possibility of achieving an interest rate cut this year.
In contrast to all this, Wall Street does not seem to be attracted enough to the brilliance of the yellow metal. The NASDAQ 100 and S&P 500 were able to close at more historical highs in a sign of high sentiment and risk appetite.
In addition, major physical gold ETFs continue to record outflows from time to time and have lost more than $4 billion in investor funds since the beginning of the year, despite everything we have witnessed and the historical gains of gold. In contrast, bond ETFs are enjoying more generous inflows this year, taking advantage of lower prices and attractive bond yields.
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