Gold prices hit lowest in about a month as dollar firms; central bank deluge eyed

Gold prices on Tuesday sank to their lowest levels in nearly a month, as the U.S. dollar firmed and oil prices climbed with investors eyeing a crush of central bank interest rate decisions this week.

Spot gold dropped 1.8% to settle at $4,597.06/oz and gold futures declined 1.8% to settle at $4,609.35/oz.

A tracker of the U.S. dollar against a basket of major currencies strengthened, making bullion more expensive for overseas buyers. The greenback has been floating just above pre-war levels, as traders view it as a relative safe-haven amid an oil supply shock due to the U.S.’s status as a major energy exporter.

Also weighing on the yellow metal was a fresh increase in oil prices following media reports that President Donald Trump was unhappy with Iran’s latest proposal to end their two-month war and reopen the Strait of Hormuz, while postponing discussions around Tehran’s nuclear ambitions to a later stage.  

Trump has stated that eradicating these ambitions were a central reason for starting his joint campaign with Israel in late February. CNN reported that mediators in Pakistan were expecting to receive a revised proposal from Iran in the next few days, citing sources close to the mediation process.

The impasse means that, for the moment, the critical Strait of Hormuz remains all but shuttered to shipping traffic, further placing upward pressure on oil prices. Roughly a fifth of the world’s crude flows through the narrow waterway off Iran’s southern coast.

Worries have abounded that the jump in oil prices will, in turn, fuel a surge in inflation that could cause central banks to consider interest rate hikes. This may not bode well for bullion, which tends to perform poorly in low-rate environments.

Central bank decisions in focus

Speaking of central banks, no less than ten rate decisions are expected this week, possibly offering insight into how the oil price spike could impact borrowing costs in countries around the world.

The Bank of Japan kicked off proceedings by leaving interest rates unchanged on Tuesday, warning of cooling economic growth and rising inflation due to the impact of the war in the Middle East.

As widely anticipated, the BoJ left its short-term policy rate at 0.75%. However, the decision was not unanimous, with three of the bank’s nine-member rate-setting board arguing for higher interest rates. It was the largest number of dissents since January 2016.

The BoJ flagged that “[g]iven that underlying inflation has been approaching 2% and real interest rates are at significantly low levels," it will "continue to raise its policy rate in response to developments in the economy, prices and financial conditions.”

In a note, analysts at Capital Economics said: "While the Bank of Japan left interest rates unchanged today, its Outlook report was hawkish and we’re sticking to our forecast that the Bank will hike rates in June." 

Later this week, the Federal Reserve, the European Central Bank, and Bank of England will announce rate decisions as well, among others.