The joint operation between Israel and the U.S. against Iran has been underway for three weeks now. Although the media occasionally reports on behind-the-scenes negotiations, tensions have not eased: attacks on Tehran continue, while Iran keeps the Strait of Hormuz under siege, making any prolonged campaign more costly.
Who will give in first?
It appears that both sides, at least the United States and Iran, are interested in a ceasefire.
For the United States, the main concern is keeping energy prices in check and preventing a spike in inflation, which could force the Federal Reserve to adopt an even more restrictive monetary policy. For Iran, the priority is obvious: to stop the destruction of infrastructure and, of course, to save lives.
That said, neither side is likely to accept a deal that looks like a loss.
Both will want to save face, which could drag the conflict out. Markets seem to be bracing for the worst as well. Oil prices aren’t falling, despite verbal interventions and even concrete plans to stabilize the market. If the situation escalates further, equities could be next—the S&P 500, Dow Jones, and others may come under pressure.
And what about gold?
After an initial rise at the start of the escalation in the Middle East, gold price has retreated back toward the $5,000-per-ounce level. This is not because investors suddenly prefer bitcoin to gold, but rather due to concerns that rising energy and commodity prices could reignite inflation, including in the U.S.
If that happens, the Fed may have to stay more hawkish for longer.
In fact, expectations for the next rate cut have already been pushed back toward the end of the year. It’s also possible that Jerome Powell strikes a hawkish tone at the upcoming press conference, something markets won’t like, except, perhaps, the dollar (DXY).
The problem is that a stronger dollar makes gold more expensive for foreign buyers, which reduces demand. Furthermore, gold does not generate a yield, so investors tend to favor income-generating assets, such as bonds.
There is also a risk that if markets panic and margin calls are triggered, large players may start selling whatever is liquid, including gold, to cover losses. Even without margin calls, when sentiment deteriorates, investors often move into cash.
Zooming out, gold still has long-term upside due to fiscal concerns in countries, geopolitical problems, and a decline in confidence in the dollar.