Gold Falls Even as the War Widens and Oil Prices Surge

Gold prices fell even as the war in the Middle East expanded and oil prices surged. It was a move that sat oddly with gold’s reputation as a safe haven.

Spot gold dropped 2.9% on Thursday to about $4,021 an ounce, and the weakness continued Friday with prices around $4,025. Silver plunged 5.9% on Thursday to about $54.40 an ounce and is heading toward its lowest closing price of the year.

The explanation starts with oil. Once Brent crude moved above $110 a barrel, markets began to worry that inflation would heat up again. Higher fuel costs feed into transportation and the prices of goods broadly, and when inflation rises, central banks have a harder time cutting interest rates.

Markets now expect the Federal Reserve to hold rates steady at next week’s meeting but see a real possibility of an increase in December. The probability of a December increase is priced at about 80%.

Gold and silver pay no interest. When rates rise and the dollar strengthens, the metals look less attractive next to assets that pay a yield. In the market’s reading, the war may create demand for safe havens, but interest rates are the bigger force pressing prices down.

Selling to raise cash added to the pressure. Justin Lin of Global X noted that when markets shake, investors tend to sell their most liquid assets first to meet margin calls and other demands.

Technically, $4,000 an ounce is seen as the line to watch. Monte Safieddine of Capital.com said a break below that level could be read as a signal that markets have given up on rate-cut expectations and begun pricing in high inflation and high interest rates.

Bitcoin moved in the same direction. After falling below $82,000 on Thursday, it traded around $81,600 on Friday. Speculative assets broadly were under pressure as investors moved to avoid risk.