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Gold and Silver Drop as Iran-Israel Tensions Ease, Fed Rate-Cuts Bets Vanish, US Debt Soars

GOLD PRICES fell to a 1-week low on Monday and silver hit 2-week lows as geopolitical tensions eased between Israel and Iran despite an overnight attack on US forces in the Middle East, while betting on US interest rates forecast that the Federal Reserve will cut by only 1/3rd of one percentage point in 2024 despite Washington's soaring government debt, writes Atsuko Whitehouse at BullionVault.
Spot gold prices in US Dollar terms dropped as much as 2.2%, hitting $2333 per Troy ounce – down $100 from this month's new all-time high – as news that Iran-backed militia in Iraq fired rockets at a US base in Syria overnight contrasted with Tehran downplaying Israel's retaliatory drone strike against the Islamic Republic last Friday.
Gold priced in the UK Pound and the Euro also hit 1-week lows, dipping through £1900 and €2200 respectively.
"Given the scale of the rally [in gold prices] since March, a period of price consolidation is hardly surprising," says specialist consultancy Metals Focus in its latest weekly analysis, noting the precious metal remains strong despite prospects for US interest rates to stay higher for longer.
Wholesale bullion in the London market has climbed 14% in US Dollars since the beginning of March, surging by almost 18% in both Pounds and Euros.
Market consensus for where the US central bank's key interest rate will end 2024 have meantime risen from 4.56% to 4.99% according to the FedWatch tool from derivatives exchange the CME, forecasting a cut of only 0.34 percentage points from today's 2-decade high on the effective Fed Funds rate.
Chart of end-2024 Fed Funds forecasts vs. gold priced in Dollars. Source: BullionVault
That forecast has now topped the Fed's own 4.60% forecast for more than 3 weeks as stronger-than-expected US payrolls data has been followed by hotter-than-expected consumer price inflation, plus 'hawkish' comments from Fed chair Jerome Powell.
"While some signs of a temporary ceiling [on gold] above $2400 have started to emerge, it is increasingly clear that normal reaction functions have been abandoned," says derivatives platform Saxo Bank's commodity strategist Ole Hansen, "with gold and recently...silver both rallying despite headwinds from normal macro drivers such as the Dollar and bond yields,".
Silver sank more than $1 per ounce on Monday, losing 4.6% as gold dropped 2.5% and trading at 2-week lows against the Dollar of $27.35.
The Dollar index, a measure of the US currency's value versus its major peers on the foreign exchange markets, today edged up to the highest level since last November, while 10-year US Treasury yields – a benchmark rate for government as well as many finance and commercial borrowing costs – rose towards last Tuesday's 5-month high of 4.67% per annum.
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"In addition to elevated geopolitical tensions, other tail risks abound, all of which have underpinned gold's investment appeal to some institutional investors," says Metals Focus, noting the high and growing government debt burden, raising questions over the long-term sustainability of the world No.1 economy's fiscal budget.
Broad bipartisan support saw the US House of Representatives on Saturday pass a $95 billion legislative package providing military aid to Ukraine, Israel and Taiwan after months of Republican Party resistance against renewing America's support for Kyiv against Russia's invasion.
Now heading to the Democratic-majority Senate, the legislation could pass as soon as Tuesday for signing off by Democrat President Joe Biden.
The United States' outstanding national debt grew to $34.5 trillion last week, according to the latest numbers published by the Treasury Department, doubling as a percentage of gross domestic product over the past 20 years to reach 120%.

Atsuko Whitehouse is the Head of the Japanese Market at BullionVault and the Editor of Japanese GoldNews.

See all articles by Atsuko Whitehouse here.

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