(Kitco News) - Growing optimism that the chaos in the Middle East will lead to a long-term peace deal is bringing some normalcy back to the marketplace, as the U.S. dollar loses some of its safe-haven appeal and easing market volatility supports equity markets.
However, the gold market is not benefiting from improving sentiment in global financial markets, as it struggles to hold gains above $4,800 an ounce. Spot gold last traded at $4,794.30 an ounce, down nearly 1% on the day.
In a comment to Kitco News, Michael Brown, Senior Market Analyst at Pepperstone, said that $4,800 an ounce is the first hurdle gold needs to clear to build further bullish confidence among investors.
Brown added that although markets are looking ahead to a potential peace deal, gold investors are being a little more cautious. He said he suspects the gold market still needs to work through the speculative froth that drove prices to all-time highs in January.
Gold is struggling even as the U.S. dollar continues to trade around 98 points, near its lowest level since late February.
“We continue to see gold trading more akin to a high beta risk asset than we do a safe haven. Also, bullion continues to display little to no correlation with traditional drivers, like the value of the dollar or where real yields are trading. With that in mind, and that dynamic seemingly unlikely to shift for the time being,” he said. “I’d argue that the outlook for gold depends on the Middle East conflict remaining on a path toward de-escalation, as we see at present. Providing that remains the case, then I’d expect bullion to remain underpinned, with the path continuing to lead to the upside for the time being.”
Looking ahead, Brown said that gold could regain its luster as the focus shifts from the current crisis to questioning how much damage has been done.
He added that the U.S. economy is in better shape to weather the current economic storm.
“Not only is the US a net energy exporter, but the consumer was also in relatively good health ahead of conflict breaking out,” he said. “On top of this, the recovery on Wall Street should allow the ‘wealth effect’ to persist, further propping up consumer spending among higher income bands.”
However, the European Union and the U.K., which both rely on energy imports, are in more precarious positions. Brown added that he continues to see growing risks that the Bank of England or the European Central Bank will make a monetary policy mistake as they deal with the inflation threat.
“This poses an interesting question as to whether the market would cheer policy tightening by bidding up the respective currency due to the higher yield on offer, or whether the market would react adversely, given that a rate hike would present another, stiffer headwind to economic activity,” he said.
In previous comments to Kitco News, Brown said that in this scenario, gold could perform well as investors seek to hedge downside economic growth risks.
