Gold Drops as Safe-Haven Demand Subsides

Spot gold prices are down by about 1.5% as geopolitical tensions across the Middle East have eased following the Israel-Iran ceasefire. Meanwhile, stocks are rising across the board as investors drift toward a risk-on attitude.

Investors typically flock to gold in times of economic uncertainty given the precious metal’s status as a store of value and safe-haven asset. After rising as high as 3.7% during the past month, spot gold is now up by less than 0.2%.

Falling Rates could Benefit Gold Prices

However, gold has a positive catalyst on the horizon. It usually performs better with lower interest rates because it is a non-yielding asset. If government debt, such as Treasury bonds, provides a lower yield, the rationale to buy gold over bonds increases. With higher yields, investors are more incentivized to buy interest-bearing bonds.

While the Fed will likely keep rates unchanged in a range between 4.25% and 4.50% during the July Federal Open Market Committee (FOMC) meeting, there is a 71.3% chance for a 25 basis points (bps) reduction and a 15.6% chance for a 50 bps reduction at the September meeting.

By December, there is a 40.6% chance that the rate will be between 3.50% and 3.75% and a 38.5% chance of a rate between 3.75% and 4.00%.

Spot gold has appreciated 27% this year with the potential for further gains as rate cuts loom.