The precious metals markets saw a slight dip in trading the day after Israel initiated a ground operation in Lebanon and Iran responded with a barrage of 180 ballistic missiles that fortunately did not result in any casualties for Israelis. Tragically, one Palestinian civilian was killed in the West Bank, as reported by the Israeli Defense Force.
Gold was trading around $2,650 an ounce, down by approximately $9, while silver remained relatively flat at $31.46.
According to Blue Line Futures Chief Market Strategist Phil Streible, the marginal increase in gold prices amidst heightened tensions could be attributed to a strengthening U.S. dollar in response to the unfolding events.
The Dollar-Gold Correlation Amid Tensions
Streible highlighted the Euro’s weakening following the escalation of violence on Tuesday.
“The Euro currency did sell off aggressively and the dollar index caught that bid,” Streible explained. “And I think that’s what put the cap on the gold market.”
While gold prices typically exhibit an inverse relationship with the dollar, there are instances when both assets can be perceived as safe havens by investors, as was likely the case on Tuesday.
Streible suggested, “December gold is now down to $2,672 and that could present some opportunities to enter into that trade.”
Inflation Talk is Starting Again
Following a Federal Reserve meeting that concluded with a 50 basis point cut, Streible noted that a recent strike involving 50,000 port workers from Maine to Texas could lead to an increase in commodity prices.
“Remember, if you have these problems where we’re not able to bring in additional materials, the commodities located in the U.S. or closely abroad should go up in price,” he pointed out. “What does that do? It pushes inflation upward. What’s that do? That pushes fed expectations for larger interest rate cuts down.”
According to recent data from the CME FedWatch tool, traders are anticipating a 65% likelihood of a 25 basis point cut and a 35% likelihood of a 50 basis point cut at the upcoming FOMC meeting on Nov. 7. Just a week earlier, traders were estimating a 57% chance of the larger rate cut.
“Gold futures need more accelerated interest rate cuts,” Streible emphasized. “We need to see a deeper cut down to the terminal rate. Does what’s happening with the port strike raise the terminal rate?”
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Insight:
Adding insight into the relationship between gold and the U.S. dollar during times of geopolitical tension highlights the complex dynamics at play in the precious metals market. Streible’s observation of how both assets can act as safe havens for investors during heightened uncertainty provides a deeper understanding of investor behavior and market reactions. Additionally, linking the potential impact of a port strike on commodity prices and inflation contributes to a broader perspective on the economic factors influencing gold prices. By considering these interconnected variables, investors can make more informed decisions in response to market developments.
