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As U.S. President Donald Trump delayed a new round of strikes against Iran, geopolitical risk premiums have notably receded, with crude oil prices plunging more than 5% on Monday (August 3), effectively easing market concerns over inflation and further rate hikes, thereby allowing gold to stabilize and rebound.
Geopolitical Risk Premium Eases, Supporting Gold Prices
Spot gold edged higher on Monday, trading near $4,060 per ounce, benefiting from cooling inflation expectations driven by the sharp drop in oil prices. In previous months, escalating U.S.-Iran conflicts had sent oil prices surging and reinforced market expectations that the Federal Reserve would have to maintain a tightening stance, keeping gold under sustained pressure. Analysts pointed out that the pullback in energy costs is “moderately reducing market expectations for further rate hikes this year,” providing key support for the non-yielding asset.
Trump said Saturday that he had called off a large-scale strike plan against Iran and was seeking to reach a negotiated agreement to reopen the Strait of Hormuz and curb Tehran’s nuclear program. However, despite the conciliatory signals from the U.S., Iran denied that any direct negotiations were taking place, clarifying that discussions were limited to Oman-brokered talks focused on the Strait of Hormuz. This uncertainty capped further upside for gold, with Tim Waterer, Chief Market Analyst at KCM Trade, noting that gold started the week “optimistic but cautious.”
Treasury Yields and Dollar Weakness Provide Additional Support
In the ripple effects of the crude oil rout, the yield on the 10-year U.S. Treasury note fell back to around 4.69% on the day, while the U.S. dollar index softened amid coordinated foreign exchange intervention by multiple nations to support the yen. A weaker dollar makes dollar-denominated gold more attractive to overseas buyers, further boosting buying interest. Meanwhile, U.S. equities closed sharply higher across the board, with the S&P 500 rising 1.48% to 7,600.50, reflecting a broader pickup in risk appetite.
Fed Remains Divided, This Week’s Jobs Data Become Crucial
Although inflationary pressures have eased modestly in the short term, market focus has quickly shifted to a slate of U.S. employment data due out this week. The Federal Reserve voted 9-3 to hold interest rates steady at last week’s policy meeting, but internal divisions were evident — three officials favored a 25-basis-point hike. Fed Chair Kevin Warsh’s post-meeting remarks were interpreted by markets as a “hawkish hold,” leaving the door open for future rate increases.
According to the CME FedWatch Tool, the market is currently pricing in roughly a 67% probability of a rate hike at the September FOMC meeting. This week’s JOLTS job openings, ADP employment report, and Friday’s nonfarm payrolls data will serve as key variables influencing shifts in this expectation. Analysts caution that if employment data come in stronger than expected, solidifying September rate-hike bets, gold could face renewed downside pressure.
Outlook
Overall, the short-term pullback in oil prices offers a breathing window for gold. However, with geopolitical tensions in the Middle East remaining fluid and the Fed’s policy path yet to be clearly defined, gold may struggle to achieve a decisive breakout. Whether gold’s rebound can sustain will depend on continued de-escalation in geopolitical tensions and whether the U.S. labor market demonstrates sufficient resilience to justify the Fed maintaining its hawkish stance.
