Gold prices rose on Wednesday as renewed geopolitical tensions between Iran and the US boosted the recent trend of the yellow metal.
Gold’s best day since 2008 was marked by a previous session of gold that saw safe-haven purchases.
As tensions between Iran and the US continue to escalate, the US military confirmed that an Iranian drone was shot down in the Arabian Sea.
Back-channel diplomatic channels and geopolitical flare up
Unmanned aerial vehicles (UAVs) approached “aggressively”, a US Navy Nimitz class aircraft carrier, USS Abraham Lincoln.
The event highlights the unstable security situation in the Gulf, an important international maritime route.
It is noteworthy that the downing occurred in a sensitive diplomatic environment.
Back-channel diplomacy seems to be underway despite the recent military flare-up.
Axios journalist Barak Ravid announced on Tuesday that crucial nuclear negotiations between the United States of America and Iran will take place on Friday in Oman, citing a source from the Arab world.
The US left the Joint Comprehensive Plan of Action in 2015, and these talks could potentially bring back the JCPOA.
Fundamentals and safe-haven
In a recent note, EwaManthey, commodities analyst at ING Group said that “safe-haven demand and ongoing central bank buying remain supportive in the medium-term.”
The latest gold rally was fueled by short-term factors, but the long-term trend of the metal’s rise is still based on the steady accumulation in the official sector.
Even though their net purchases decreased slightly last year, central banks continued to remain substantial buyers.
The gold contract at COMEX is currently at $5.102 an ounce. This represents a 3.4% increase, and the silver contract at $87.343, representing a 5% rise from its previous closing.
The silver price has also increased on Wednesday in parallel with the gold price.
Last week the COMEX silver price reached an all-time high at $120 for one ounce. However, it fell along with gold prices sharply on Friday.
Prices fell to less than $75 per ounce on Monday.
The gold price had dropped from its record high of $5,600 per ounce down to less than $4,500.
Silver’s fundamentals should remain largely unchanged, despite the likelihood of continued high volatility.
Market stability is supported by tight structural physical balances, and by industrial demand fueled by electrification.
Manthey stated that “Silver’s greater volatility makes it more susceptible to changes in sentiments and positions than gold.”
For silver to have a durable recovery, ETF withdrawals must stabilise.
ETFs demand is still a major driver for prices even though holdings are down eight days in a row.
US shutdown, Fed rates cuts and Hopes
On Tuesday, US president Donald Trump passed a bill to end the partial shutdown of government.
Source: ING Research
The shutdown caused delays to the publication of important labor statistics reports that were originally planned for this week.
Investors expect at least two rate reductions from the Federal Reserve by 2026.
Market participants are now waiting for the ADP payroll data to be released later that day in order to gain more insight on the Fed’s policy future.
When interest rates fall, non-yielding investments like gold typically perform better.
As new information becomes available, this post may change.
