Gold tumbles as US blockade of Hormuz raises inflationary risks

[SINGAPORE] Gold tumbled on mounting inflation concerns, after US-Iran peace talks ended without resolution and American plans to blockade the Strait of Hormuz deepened a global energy-supply shock.

Bullion fell as much as 2.2 per cent to dip below US$4,650 an ounce, wiping out the previous week’s gain. The US military said that it will begin the blockade at 10 am Eastern Time on Monday (Apr 13) after weekend negotiations with Iran failed to secure a deal to turn a fragile ceasefire into a lasting peace after six weeks of war in the Middle East.

Oil and natural gas prices surged, with US President Donald Trump also saying the US will interdict any vessel that has paid a toll to Iran for safe passage through Hormuz, the maritime choke point that links the Persian Gulf to global markets. Before the war, a fifth of the world’s crude and liquefied natural gas passed through the strait.

Equity futures slid and a gauge of the US dollar rose as much as 0.5 per cent, a headwind for gold that’s priced in the US currency. The spike in energy prices also raised inflationary risks, making it more likely that central banks will delay cutting interest rates or even hike them. This is a negative for non-yielding bullion, which benefits when borrowing costs are lower.

In an early reading of the war’s impact on the US economy, March inflation climbed by the most in nearly four years, with a record increase in petrol prices responsible for nearly three-quarters of the monthly advance, according to data from the Bureau of Labor Statistics released on Friday.

Bullion has fallen more than 11 per cent since the US-Israel war with Iran began at the end of February, with a liquidity squeeze in the conflict’s early weeks pushing investors to offload the metal to cover losses elsewhere. In recent weeks, gold has clawed back some losses as a growing focus on slowing economic growth countered the risk of higher inflation.

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This shift should continue to provide some support for bullion despite the sharp decline in early trading Monday, said Daniel Hynes, senior commodity strategist at ANZ Banking. “I suspect gold could threaten last week’s low of US$4,650 but ultimately hold at these levels,” he said.

Spot gold fell 1.6 per cent to US$4,674.32 an ounce at 8.25 am in Singapore. Silver slid 2.7 per cent to US$73.81 an ounce. Platinum and palladium also declined. The Bloomberg Dollar Spot Index was up 0.4 per cent. BLOOMBERG