Gold slips 2% amid firmer dollar as Brent tops $100, stoking inflationary fears

Gold fell on Thursday after hitting over a two-week high in the previous session, as the dollar firmed amid soaring oil prices, fueling inflationary concerns and driving up U.S. Treasury yields on rising expectations for Federal Reserve rate hikes. 

The yellow metal had bounced back over the last two days, largely helped by technical buying after repeatedly testing the key psychological level of $4,000/oz last week.

Spot gold slipped 2% to settle at $4,049.56/oz, while gold futures declined 2.4% to settle at $4,052.40/oz. Bullion had previously rallied about 3% over Tuesday and Wednesday.

“Could this simply be a minor bout of profit-taking which will soon run its course, or are lower cycle lows still in prospect? There’s some mild support around $4,080 and if gold can hold around here then a rebound looks possible. But it needs to break above $4,200 with some conviction to really get the bulls on board. Whether it can do this while the U.S. dollar remains strong remains a big question,” David Morrison, senior market analyst at Trade Nation, said.

Houthi attacks threaten to widen conflict 

Oil prices jumped on Thursday, with Brent crude futures, the global benchmark, topping $100 a barrel for the first time since May 26. The advance was driven by increasing supply disruption concerns, after Iran-backed Houthis in Yemen took responsibility for strikes on two Saudi Arabian tankers in the Red Sea, the first since the militia announced a blockade on Saudi vessels this week.

The attacks threaten to further disrupt global oil supplies out of the region, with Kpler estimating 1.9 million barrels a day of Saudi west coast refining capacity exposed to potential Houthi missile hits.

The shipping tracker also said confirmed vessel crossings through the Strait of Hormuz had dropped by 75%, leaving more oil accumulating in the Gulf. Ships have become increasingly cautious in transiting the vital waterway amid continued tit-for-tat strikes between the U.S. and Iran.

U.S. Central Command on Wednesday completed a 12th consecutive night of bombardment against Iran, while its naval blockade had redirected nine commercial vessels and disabled one to prevent ships from entering or exiting Iranian ports. Tehran has retaliated by striking U.S. military bases in neighboring countries such as Kuwait, Jordan, and Bahrain.

President Donald Trump on Thursday morning criticized the Houthis. He said they had "acted very responsibly" over the past year but were now "starting up again" by shooting at the two Saudi ships.

"If they do this again, the U.S. will hold Iran responsible, in that the Houthis are a Surrogate and/or Proxy of Iran, and major military punishment will be inflicted upon Iran and, of course, the Houthis, themselves, who I am very disappointed with in that they have, until now, acted very professionally and smart," the U.S. leader said.

The jump in oil prices has put inflationary concerns back on the table. The Fed is in its communication blackout period this week, and is expected to hold interest rates steady on July 29. But the odds of that happening have fallen to about 66% from around 88% a week ago, according to the CME FedWatch tool, while the odds of a quarter-point rate hike have moved up to nearly 34% from around 12% a week ago.

Higher rate environments tend to bode poorly for non-yielding assets such as gold. They also strengthen the dollar, which in turn can put pressure on the yellow metal as it makes bullion more expensive for foreign buyers. 

ANZ analysts said investors have continued rebuilding gold positions despite the prospect of elevated interest rates, suggesting recent weakness has attracted buyers rather than triggering fresh selling. They noted that non-commercial net long positions have climbed to their highest level since January, while renewed inflows into gold-backed exchange-traded funds indicate some investors are using bullion to hedge against increasingly stretched equity valuations.