(Bloomberg) — Gold pared dramatic losses as US President Donald Trump postponed military strikes against Iranian energy infrastructure for a five-day period after what he described as productive talks toward ending hostilities.
Spot gold briefly traded higher before slipping more than 2% as Iran denied the discussions. Silver rebounded, erasing losses of more than 10%. US stocks rose while Treasury yields and the dollar retreated. Traders reduced bets on Federal Reserve tightening, pricing in some easing.
“Gold is right now trading like a risk asset, as it has during most broad risk-off moments over the past two decades,” analysts at Citigroup Inc. wrote in a note Monday. “This pro-cyclical risk asset behavior is particularly extreme given the large amount of momentum and retail buying of gold that we have seen over the past six months.”
Trump suggested the US and Iran could jointly control the Strait of Hormuz, a key shipping passage off Iran that’s effectively closed, adding that the strait could be open very soon “if it works.”
Earlier, he posted on social media that the US and Iran held “VERY GOOD AND PRODUCTIVE CONVERSATIONS REGARDING A COMPLETE AND TOTAL RESOLUTION OF OUR HOSTILITIES IN THE MIDDLE EAST,” He added that the suspension of plans to escalate the campaign is subject to the success of ongoing discussions.
However, Iran hasn’t had “direct or indirect communication with Trump,” the country’s semi-official Fars news agency reported, citing an anonymous Iranian source.
Gold’s poor performance throughout the war can partly be explained by a dash for cash, as the conflict sees investors ditch their relatively liquid and profitable positions. Expectations of higher interest rates and a stronger dollar have also added to headwinds for non-yielding bullion.
Since the conflict began, surging energy prices have raised the odds of rate hikes by the US Federal Reserve and other central banks. A similar dynamic followed the Russian invasion of Ukraine, when an initial spike in the safe-haven asset was followed by a months-long decline, as an energy price shock rippled through markets and added to inflationary pressures.
Gold’s reaction “to the current macro-economic shock has a clear market precedent,” said David Wilson, director of commodities strategy at BNP Paribas SA. “If you look at all three previous economic-shock cycles – in 2008, 2020 and 2022 – gold initially fell as markets reacted to news flow, with investors typically selling assets to hold the US dollar,” he said, adding that all three periods were followed by a sustained rally.
Analysts have also pointed to the possibility the conflict triggering central bank gold sales, or at least slowing purchases. The monetary institutions have been on a massive accumulation streak since 2022, although that pace of those purchases had already started to slow going into this year.
“It is likely that some central banks are selling gold to defend their currency and/or to fund energy purchases,” and that this was behind gold’s precipitous drop early Monday said Bernard Dahdah, an analyst at Natixis.
Some states that have been accumulating bullion are energy importers, so a steeper oil and gas bill means fewer dollars retained to be recycled into gold. Beyond that, Gulf states have seen their much-needed flow of dollars crimped by the closure of the Strait of Hormuz, although they have sizable holdings of other dollar assets beyond gold.
“USD surpluses were increasingly being recycled into gold,” said Daniel Ghali, strategist at TD Securities. “The Iran conflict blew this dynamic up.” Gold’s long-term outlook still looks healthy, he said, but in medium term the pain shared by Middle Eastern oil producers and oil consumers had challenged the metal’s bull run.
Spot gold was down 2.3% at $4,485.21 an ounce at 12:13 p.m. in New York. Silver rose 1%. The Bloomberg Dollar Spot Index, a gauge of the US currency, fell 0.3%.
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