Gold prices pull back as Fed jitters offset safe haven demand

Investing.com-- Gold prices retreated from over two-month highs on Thursday as caution before a speech by Federal Reserve Chair Jerome Powell somewhat offset safe haven demand fueled by the Israel-Hamas war. 

The yellow metal appreciated sharply this week as an escalation in the Israel-Hamas conflict spurred concerns over a spillover into the broader Middle East region, which in turn fueled demand for conventional safe havens.

But this trade was cut short by a recovery in the dollar, while U.S. Treasury yields shot back up to multi-year highs as markets positioned for higher interest rates. 

Still, gold prices remained within sight of an over two-month peak hit earlier this week, as markets awaited fresh developments in the Israel-Hamas conflict. The cancellation of a summit between U.S., Egyptian and Palestinian leaders had also spurred more safe haven demand for the yellow metal.

Spot gold fell 0.1% to $1,946.51 an ounce, while losses in gold futures were more pronounced, with futures down 0.5% at $1,958.35 an ounce by 00:31 ET (04:31 GMT). 

Rate risks in play as Powell speech looms 

But whether gold could push higher remained in doubt, especially before a speech by Powell where the Fed chair is widely expected to reiterate his stance on higher-for-longer interest rates. 

A surge in Treasury yields this week indicated that markets are also pricing in higher interest rates, especially as recent data pointed to an unexpected upswing in U.S. inflation. Overnight comments from other Fed officials also reiterated the bank’s hawkish outlook.

The dollar benefited from this speculation, rising 0.3% overnight and cutting short a rally in most commodity markets, including gold. 

Higher interest rates bode poorly for non-yielding assets such as gold, given that they increase the opportunity cost of investing in such assets as compared to relatively safe Treasuries. The dollar also benefits from such a scenario, which directly weighs on the price of gold. 

Copper slips as China property woes offset GDP cheer 

Among industrial metals, copper prices fell on Thursday, coming under pressure from renewed fears of a property market meltdown in China. 

Copper futures fell 0.3% to $3.5713 a pound. While the red metal saw some gains on stronger-than-expected Chinese gross domestic product data, this was largely offset by concerns over a massive default in China’s property market.

Beleaguered developer Country Garden (HK:2007) appeared to have missed a key repayment on its offshore bonds, likely pointing to a default for most of the firm’s foreign debt. This is expected to spark a string of defaults for the firm, as it struggles to restructure its oversized debt obligations. 

Any headwinds to China’s property market bode poorly for copper demand, given that the country is the world’s biggest copper importer. The property market also accounts for a large portion of China’s copper appetite.