(Bloomberg) — Gold advanced, recovering some of the losses of the previous session, as dip-buyers entered a market fraught with risk on the fifth day of war in the Middle East.
Bullion climbed as much as 2.3%, clawing back ground after a four-day winning streak ended Tuesday. Traders are balancing gold’s risk premium against a stronger dollar, with a gauge of the US currency rallying earlier in the week before edging lower.
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The Middle East conflict’s inflationary impact on energy prices has prompted traders to scale back bets on monetary easing — a retreat that would be bearish for bullion, which doesn’t carry interest — while a broad selloff across equities on Tuesday forced some gold investors to liquidate their positions to meet margin calls elsewhere in their portfolios.
Gold’s heavy loss on Tuesday “raised eyebrows, having initially benefited from safe haven demand,” analysts at BMO Capital Markets including Helen Amos wrote in a note. The pullback happened as “spiking treasury yields on inflation concerns, strong US dollar, and forced liquidation for balance sheet protection overpowered its safe haven characteristics.”
Underscoring a sharp pullback in bullish bets, money managers’ net-long position in gold has fallen since late January to approach the lowest in a decade, according to data from the Commodity Futures Trading Commission. That relatively low level “should limit the extent of any down move” in gold, said Peter Kinsella, global head of forex strategy at Union Bancaire Privee, UBP SA.
Bullion has rallied by about a fifth this year — hitting an all-time high above $5,595 an ounce in late January — with demand supported by persistent geopolitical and trade tensions as well as concerns about the US Federal Reserve’s independence.
“I think we will definitely see a recovery for gold,” said Kinsella, adding that longer-term drivers remain unchanged. “If anything, an inconclusive outcome to the war highlights ongoing geopolitical risks to a greater extent than before.”
Inflationary risks from surging energy prices, however, could limit bullion’s gains by forcing the Fed and its global peers to hold interest rates steady for longer, or even hike them. Traders have priced in a roughly 80% chance of more than one quarter-point rate cut by the Fed this year, after fully pricing in two cuts as recently as Friday.