Gold Prices Surge as Mideast Tensions Escalate: Israeli Ultimatum Boosts Demand
Gold prices experienced a significant surge on Friday amid escalating tensions in the Middle East. The situation took a dramatic turn after Israel issued a 24-hour ultimatum to Palestinians in Gaza, demanding their evacuation. The Israeli army’s preparation for a massive assault in Gaza sent shockwaves of heightened geopolitical tensions throughout the region, prompting a surge in gold prices. As the metal surpassed the key resistance level at $1900, a massive short squeeze occurred as short positions built up when gold yielded to bearish pressure.
Despite the rally of the US dollar and a pullback in US yields, gold remained unfazed and closed with an impressive gain of 3.32% at $1932 on Friday. For the week, the yellow metal recorded a gain of $100 as ten-year US yields dropped nearly 4% to 4.61%. The US Dollar Index also closed with a gain of 0.60% at 106.67 on a weekly closing basis.
The escalating Mideast conflict has put pressure on the United Nations as it grapples with the logistical challenges of potential mass displacement. The UN has stated that it would be impossible for the millions of inhabitants of North Gaza to move to the South on such short notice, potentially leading to a humanitarian disaster. In response, thousands of people across the Middle East have risen in protest against Israel’s planned assault on Gaza.
In a significant setback for US President Biden’s Middle East strategy, Saudi Arabia has decided to pause its diplomatic efforts to normalize ties with Israel. This development is expected to push oil prices higher in the near future.
Meanwhile, European Central Bank President Christine Lagarde has indicated that further interest rate hikes may be necessary if the need arises. However, market participants believe that the ECB is likely to conclude its rate hikes for now.
The belief that tighter credit conditions do not warrant further rate hikes is gaining traction among officials from the Federal Reserve and the ECB. In recent speeches, all Federal Reserve officials, except Governor Michelle Bowman, have cited high yields as a reason to keep interest rates unchanged in the near future.
In China, there are indications of the economy losing momentum once again, as reflected in the September Consumer Price Index (CPI) inflation data falling short of expectations. Chinese banks’ loan growth also declined year-on-year in September.
Last week, the US released its inflation data, with the headline CPI increasing by 0.4% compared to August. The year-on-year change was noted at 3.7%, slightly higher than the forecast of 3.6%. Core inflation remained at 0.3% month-on-month, in line with expectations, while the year-on-year reading decreased to 4.1%, as anticipated. This puts the annualized core CPI at 3.9%, significantly higher than the Fed’s 2% target.
While core goods prices declined due to a drop in used-car prices, core services accelerated, primarily driven by rents. The University of Michigan Consumer Sentiment fell in October, and inflation expectations for both one year and five years increased.
Looking ahead, investors will closely monitor China’s GDP, retail sales, and industrial production data for the third quarter, as well as the People’s Bank of China‘s interest rate decision. In the US, retail sales, industrial production, housing starts, and existing home sales data will be in focus. The UK will release its monthly job report, CPI, and retail sales data. The Eurozone’s inflation data and Germany’s ZEW Survey expectations will also be closely watched.
The recent sharp turnaround in gold prices is unexpected, driven by geopolitical factors in the Middle East. The metal has rebounded more than 6% from its recent low of $1810. Going forward, gold’s short-term performance will heavily depend on the situation in the Middle East. Traders should expect volatility and consider buying the dips with strict stop-loss measures.
Disclaimer: The article above is based on the author’s opinion and should not be considered financial advice. The views expressed in the article do not necessarily reflect those of Economic Times.
