When the War Premium in Gold Would Vanish?

Gold prices are moving up by 2.0% to $1875 per troy ounce since the beginning of the week. This is the area where future direction of gold prices would be decided. They could move either to $1920 per ounce or would test the support at $1820-1840 per ounce.

Tragic outbreak of violence in the Middle East pushed gold prices up. Israel is preparing to launch ground offensive against terrorist Hamas group that dig itself deep in the Gaza strip ground. Israeli airstrikes pave the way to the full-scale on-ground military operation. This operation is associated with major risks as the situation in the Middle East is very complicated with many players and stakes put around the conflict. An expansion of the conflict may involve other hostile nations like Iran or Syria to fight against Israel. 

The current resistance level at $1870-1880 per ounce of the yellow metal could be an indication of such expansion. As long as investors do not believe in the escalation of the conflict prices are likely to remain below this level holding a 2-3% war premium. In case of de-escalation prices would likely to return to $1820-1840 per ounce, and may possibly go even deeper. This looks like a primary scenario that is supported by capital outflows from SPDR Gold Trust (GLD) EFT. Capital outflows are recorded during the last six weeks with the outflow of $236.3 million in the last week. A similar situation was noticed in August-September 2022, when bullion prices lost 10%. That drop is twice as much as the current one of 5-6% during the last five weeks. So, prices have some room for the downside.

On the other hand, the Federal Reserve (Fed) has recently made several dovish messages signalling that no further interest rates hikes are needed in 2023. Some Fed officials believe that monetary conditions has become tight enough amid soaring borrowing costs. The U.S. 10-year Treasuries yields rolled back to 4.56% from the 4.80% after Fed’s dovish rhetoric. Still, these levels of yields are too high to remove the pressure from gold prices, and to avoid them to dive below $1800 per ounce. This might be amplified by slowing down inflation. The latest inflation data in the U.S. will be published this Thursday.