Gold declines below $4,100 as fresh US-Iran strikes stoke inflation fears

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Gold price (XAU/USD) attracts some sellers to near $4,070 during the early Asian trading hours on Monday. The precious metal extends its decline amid escalating tensions between the US and Iran.

Gold price declines to around $4,070 in Monday’s early Asian session.
The US launched fresh missile attacks against Iran on Sunday.
Traders await the US June CPI inflation report on Tuesday.

Gold price (XAU/USD) attracts some sellers to near $4,070 during the early Asian trading hours on Monday. The precious metal extends its decline amid escalating tensions between the US and Iran. Traders will take more cues from the release of the US June Consumer Price Index (CPI) inflation data, which is due on Tuesday.

The US military said that it launched additional strikes against Iran on Sunday aimed at further weakening the Islamic Republic’s ability to strike civilian vessels transiting the Strait of Hormuz, Bloomberg reported. The US Central Command (CENTCOM) said in a social media post that the strikes were designed to limit Iran’s ability to attack civilian ships in the Strait of Hormuz.

Ongoing missile strikes between Washington and Tehran have boosted energy costs, triggering fresh inflation concerns and forcing the US Federal Reserve (Fed) to maintain its higher-for-longer rate stance. It’s worth noting that Gold is often used amid geopolitical uncertainty but does not yield interest, making it less attractive when interest rates are high.

The US CPI inflation data will take center stage on Tuesday. Analysts expect the headline CPI to decline by 0.1% MoM in June, while the core CPI is projected to show a rise of 0.3% during the same period. If the report shows a softer-than-expected outcome, this could weigh on the US dollar (USD) and support the USD-denominated commodity price in the near term.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.