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Rising Interest Rates Pose Challenges For Gold And Oil

  • Geopolitical conflicts have increased demand for safe-haven assets, driving up gold and silver prices.
  • Fluctuations in the dollar index and rising interest rates impact the attractiveness of precious metals to investors.
  • Despite market uncertainties, precious metal prices continue to trade at historically high rates.
Federal Reserve

Via Metal Miner

Precious metals like gold and silver are often seen as a safe haven asset during times of economic uncertainty. In recent weeks, we have witnessed a significant increase in the number of global conflicts, imposing high uncertainty and risk among markets for investors. Still, the jury is still out on how this will affect precious metal prices as a whole.

As participants seek to hedge against the risks presented by these conflicts, buyers continue to pour money into gold, causing an uptick in demand for precious metals. However, the dollar index, gold, and oil prices are all interconnected. A stronger dollar makes gold and oil more expensive for foreign investors, which can lead to a decline in their prices. Rising interest rates can also make gold and oil less attractive, as investors can earn a higher return on their money by investing in bonds and other fixed-income assets.            

Contrarily, a weaker dollar can make gold and oil more attractive to foreign investors, which can lead to a rise in their prices. Falling interest rates can also make gold and oil more attractive, as investors have fewer alternative investment options. Indeed, recent events in the Middle East continue to significantly impact financial assets across markets. The war has thus far caused a sharp increase in gold and oil, leading to rising inflation and more concerns about a global recession.

This, in turn, has led to a flight to safety among investors, who have been frantically buying up assets like gold, silver, and the U.S. dollar. And with global events driving investors into safe-haven assets, gold prices currently show short-term reversal patterns to the upside, as noted on MetalMiner Insights. Indeed, prices for the precious metal recently tapped into support zones near $1800/oz. When the Hamas-Israel conflict began, they bounced back over $1900/oz, demonstrating just how much the war is a major driving force for recent price action in this market.

The Dollar Index, the Fed, and Precious Metal Prices

Prices for the dollar index also increased significantly over recent months. DXY prices increased about 7% since July 2023. This indicates a potential flow of investors pouring in due to anticipated rate hikes from the Fed. Generally speaking, a higher dollar usually leads to a lower gold and silver price. However, when global conflicts began to rise in recent weeks, the dollar index began to show bearish patterns, potentially indicating an incoming downtrend.

Precious metal prices, including gold and silver, continue to trade at historically high rates. And while global conflict and other macroeconomic forces prove the main drivers of current price action to the upside, gold faces pressure within technical resistance zones and bearish price action as markets continue going up. This is due to price ceilings forming near the all-time highs, just past $2000/oz. While investors and other market participants often seek opportunities during times of war, markets remain uncertain due to a number of factors. Some prime examples include inflationary risks, geopolitical conflict, supply strain, and weaker emerging markets.

Market Trends Remain Hard to Predict

Ultimately, the near term outlook for the dollar index, precious metal prices, and oil markets is uncertain. The war in the Middle East, Ukraine, macroeconomic events, rising inflation, and the prospect of aggressive interest rate hikes from the Fed will all likely continue supporting the dollar index. However, other factors, such as concerns about a global recession and increased oil supply, could weigh on gold and oil prices.

Overall, the recent conflicts have had a mixed impact on precious metals and the dollar index. On the one hand, they have increased demand for safe-haven assets like gold and silver. On the other hand, the war has also strengthened the U.S. dollar, which has been a headwind for precious metals prices.

By Jimmy Chiguil


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  • Mamdouh Salameh on October 23 2023 said:
    This was the case until recently but not anymore. The reason is the decline in Central banks’ influence over gold prices. This is due to two major factors: One is scarcity of gold and the second is an increasing lack of confidence in the US dollar.

    The amount of gold in the world is very limited. About 244,000 metric tons of gold have been discovered to date (187,000 metric tons historically produced plus current underground reserves of 57,000 metric tons). Moreover, current annual production is estimated at 3,750 tons

    Because of its relative scarcity and the robust demand for it, gold prices are exceeding whatever hikes in interest rates the US Federal bank, for instance, undertakes.

    Another major factor is an increasing lack of confidence in the US dollar. The United States is virtually bankrupt. It is facing a growing risk of a debt crisis, increasing global drive for de-dollarization, rising challenges from the petro-yuan for the dollar’s dominance in the global oil trade and declining value of the dollar.

    The US national debt has surged from $31.4 trillion in July to $33.5 trillion in less than four months or 126.4% of US GDP. Moreover, the US faces $7.6 trillion of maturities of public debt in the next twelve months, according to Goldman Sachs.

    A rising US debt of such dimensions is causing investors to become wary of the stability of the US financial markets and seek safe-haven assets such as gold.

    As for oil, it used to be the case before that when the value of the dollar rises against other currencies, this causes both the demand for oil and its price to decline but hardly anymore. The robust global oil demand is overpowering any rises in the dollar particularly in the current tight market.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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