Gold Approaches $2,000 Mark: Middle East Tensions and Rate Hike Speculations Interplay

Gold prices are quickly approaching the key $2,000-per-ounce mark as tensions in the Middle East only heighten and rate hike speculations continue. Gold futures reached just a few dollars from the psychological $2,000 line on Thursday’s close before skyrocketing above trading lines throughout the day on Friday. Highs for gold futures on Friday reached above $2,017 per ounce, a level we haven’t seen since the beginning of the rate-hiking cycle.

The resurgence of safe-haven demand, combined with leveling interest rates, has created the perfect environment for gold’s climb to fame. The Israeli-Palestine conflict started on October 7, though it has only escalated with each passing day, allowing gold to climb steadily above three-month highs in just two weeks.

Missile strikes on Gaza continued this week while Israel stated its plan to enforce ground assaults across the region. Such statements mean one thing: the war is only escalating.

“You see Gaza now from a distance, you will soon see it from inside. The command will come,” Yoav Gallant, the Israeli Defence Minister, told Gaza border troops last Thursday.

“All the indications are that the worst is coming,” Ayman Safadi, the foreign minister of Jordan, stated.

Based on the latest updates, more than 1,400 people have died in Israel, with most being civilians. This figure represents a significant increase from the initial attack on October 7.

As conflicts worsen, gold gains more demand with its title as a safe-haven asset. Traders around the world are moving assets around to place more weight on secure commodities in case a large-scale war breaks out. Numerous nations, including the United States, have already become involved in conflicts in the Middle East.

On Thursday, October 26, U.S. President Joe Biden ordered air jet strikes in Eastern Syria to target the Islamic Revolutionary Guard Corps run by Iran.

“These narrowly tailored strikes in self-defense were intended solely to protect and defend U.S. personnel in Iraq and Syria,” U.S. Defense Secretary Lloyd J. Austin explained in a statement.

With airlines shutting down travel to the area and nations increasing their travel advisories, people around the globe are experiencing the ramifications of the event. Global gold prices have increased at an exceptional rate since October 7, despite the strength in the U.S. dollar and Treasury yields on Thursday.

On Thursday alone, spot gold increased by 0.5% to $1,988.85 per ounce, while December gold futures rose by 0.2% to an impressive $1,999.20 per ounce. At the time of writing this on October 27 (8:18 p.m. GMT), gold futures reached $2,017.30 per ounce.

The other major item boasting well for gold right now is the upcoming Federal Reserve meeting. In recent remarks, multiple Fed committee members expressed more dovish statements than expected regarding the upcoming interest rate decision scheduled on November 1. High interest rates increase the opportunity costs of investing in non-yielding assets, like gold, so the hope of lower rates in the near future bodes well for the precious metal.

Federal Chair Jerome Powell agreed “in principle” that the recent higher rates have helped the tighter economic conditions and “at the margin” could lower the need for future rate hikes. This statement came as a shock to many after September’s meeting minutes, offering further support for gold prices.

Lorie Logan, the Dallas Federal Reserve President, agreed with Powell’s sentiment, explaining that the committee has time to make its next interest rate decision. Given the recent economic data, Logan believes the Federal Reserve doesn’t need to increase or cut rates any time soon. “We have some time,” Logan explained when discussing the next interest rate decision.

The probability of a rate cut continues increasing inch by inch with each passing day as more data comes through. According to CME’s FedWatch Tool, the odds of a rate pause during November’s meeting sit at 97.4%. Right now, we’re looking at a 2.4% chance of the first rate cut in November, meaning the market is currently placing a 0% chance on a rate increase during the upcoming meeting.

The likelihood of a rate cut increases significantly by May of next year to over 41%. When the first rate cut may actually come is highly unpredictable at this point in time. What we do know is that gold responds positively to any dovish views from the Fed, so when we do begin hearing of rate cuts, the precious metal will likely respond quite positively.

As always, investors should consult their advisors before making any portfolio moves.

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