Gold retreats from highs near $4,700: with both geopolitical risks and inflation expectations driving the market, where is the next stop for gold prices?

Huitong Net, August 25th — US-Iran confrontation escalates — the US launches action to cut off Iran’s economic activity, Iran threatens to stop Gulf oil exports — supporting safe-haven bids for the US dollar and triggering profit-taking in gold. However, concerns over US national debt surpassing 4 trillion dollars are reviving “currency depreciation trades”, providing alternative value storage demand that supports gold.

On Tuesday (August 25th) during the European session, spot gold surged and then retreated, currently trading below $4,650/oz, having pulled back from around $4,700 (the highest level since May 14). Although US July inflation data was moderate, inflation risks driven by oil price volatility have led the market to still price in about a 75% probability of a rate hike before the end of the year.

The US-Iran confrontation escalates — US Treasury Secretary Bessent announced measures to cut Iran off from the global economy, while Iran warned that if the economic war continues, it will halt oil exports from the Gulf — geopolitical uncertainty is fueling safe-haven demand for the US dollar, while gold faces profit-taking after hitting multi-month highs.

The short-lived boost from US Treasury repos has been offset by concerns over US national debt surpassing 4 trillion dollars; the revival of “currency depreciation trades” may continue to support demand for gold as an alternative value storage tool.

Geopolitical and Inflation Risks Support the Dollar, Gold Retreats from Multi-Month High

Spot gold is currently trading below $4,650/oz, having retreated intraday from around $4,700 (the highest since May 14).

On Monday, US Treasury Secretary Bessent announced action to cut Iran off from global economic connections, warning that any country doing business with Iran faces risk of US sanctions.

Iranian security officials warned that if the economic war continues, oil exports from the Strait of Hormuz and the entire Persian Gulf will be halted. The persistent geopolitical risk premium is supporting safe-haven bids for the dollar.

Additionally, inflation risks triggered by oil price volatility have led the market to continue pricing a roughly 75% probability of a rate hike before the year's end, further supporting the dollar and encouraging profit-taking in gold after it hit multi-month highs.

Short-lived US Treasury Repo Effects, Currency Depreciation Trades Support Gold

The US Treasury’s expanded repo strategy prompted only a brief initial drop in US Treasury yields; market concerns over national debt surpassing 4 trillion dollars have resurfaced, reviving “currency depreciation trades”.

This may continue to support demand for gold as an alternative value storage tool.

The cooling of Fed September rate hike expectations is making traders reluctant to make aggressive bullish bets on the dollar, instead waiting for more policy path signals.

This Week’s Focus: PCE Data & Jackson Hole Speech

Market focus is shifting to Wednesday’s US PCE Price Index and Fed Chair Walsh’s Friday speech at Jackson Hole. These events will provide more signals about the Fed’s policy path and determine the short-term direction of the dollar, giving gold prices new momentum.

Before that, strong follow-through selling is needed to confirm that gold has topped and further depreciation is likely.

Summary

Spot gold is trading below $4,650/oz, having retreated intraday from the $4,700 level, the highest since May 14. The US-Iran confrontation escalates — the US moves to cut Iran off from the global economy, Iran threatens to halt Gulf oil exports — bolstering safe-haven demand for the dollar and prompting profit-taking in gold.

The market still prices in about a 75% chance of a rate hike before year-end. The positive impact of the US Treasury repo is short-lived, while worries about US national debt surpassing 4 trillion dollars revive “currency depreciation trades”, supporting gold demand.

The market is focusing on Wednesday’s PCE data and Friday’s Jackson Hole speech for clues on the Fed policy path.


(Spot gold daily chart, source: Yihuitong)

Beijing time, August 25th, 15:24, spot gold quoted at $4,640.63/oz.