(Bloomberg) — Gold retreated after a modest two-day recovery, as conflicting statements from the US and Iran raised doubts about prospects for a resolution to the war in the Middle East.
Bullion fell as much as 2% to dip below $4,420 an ounce and erase most of the gains from the previous two sessions. While the White House insisted talks to end the conflict with Iran are taking place, Tehran publicly rejected US overtures and issued conditions of its own. Even as it pursues diplomacy, the US ordered thousands of troops to the region, fueling fears of a risky ground invasion.
Since the war began nearly a month ago, gold has fallen more than 15%, moving largely in tandem with stocks and in an inverse relationship with oil. Spiking energy prices have raised the risk of inflation and led investors to bet that central banks will keep interest rates unchanged, or hike them. That’s a headwind for non-yielding bullion.
The prospect of a rate increase by the Federal Reserve may be moderated by the risk of an economic downturn in the US caused by a protracted war. Wall Street is cutting its forecasts for the American economy this year, boosting its projections for inflation and unemployment and nudging up the odds of a recession.
Oil advanced on Thursday, with Iran’s parliament also starting work on a draft bill to impose a fee on vessels seeking safe passage through the Strait of Hormuz, the critical chokepoint for energy supplies that’s been effectively closed since the war began. Asian stocks declined, snapping a two-day gain.
Around 85 tons of gold holdings in exchange-traded funds have been redeemed since the war began, according to a Bloomberg calculation. Even at $4,500 an ounce, a further 83 tons of holdings remain lossmaking and therefore vulnerable to liquidation, analysts from Standard Chartered Plc including Sudakshina Unnikrishnan said in a note. That’s around $12 billion based on gold’s closing price on Wednesday.
“Frothy positioning is likely to remain vulnerable in the near term,” the analysts said.
Spot gold fell 1.5% to $4,437.62 an ounce at 2:29 p.m. in Singapore. Silver fell 1.8% to $69.90, while platinum and palladium also fell. The Bloomberg Dollar Spot Index was flat.
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