Gold (XAUUSD) has failed to behave like a safe haven amid escalating tensions in the Middle East and is down by over 5% on Thursday. In addition, the precious metal usually benefits from expectations of higher inflation. Higher gas and oil prices from the U.S.-Iran war and disruptions to the Strait of Hormuz have raised the risk of inflation. However, gold has fallen 8% since the start of the conflict on February 28.
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Trade QQQ with leverageA major factor sending gold lower is falling rate cut odds. Gold tends to benefit from lower rates, as the opportunity cost of holding it relative to interest-bearing assets, like Treasuries, goes down.
Gold Faces Headwinds from Profit-Taking and Strong U.S. Dollar
When the war began, the most favored outcome at 33.7% was for the Fed to cut rates twice this year, according to the CME FedWatch tool. Now, the most likely outcome is for zero rate cuts by year-end with 72.8% odds.
Furthermore, investors may be taking profits following a historic run in the precious metal. With the S&P 500 (SPX) down by 4% over the past month, capital could be rotating into the index and out of gold. Meanwhile, the U.S. Dollar Index has risen 1.75% during the past month, putting additional pressure on gold as a stronger dollar makes the metal more expensive for overseas buyers.