Gold prices continue to rise, with news of US-Iran talks providing relief to the market

After the United States put forward a proposal to end the war in the Middle East, gold prices kept rising after breaking the streak of nine straight days of declines.

Gold once rose by 2.8%, climbing further on top of the 1.6% surge in the previous trading day. The United States has drafted a 15-point plan aimed at ending its conflict with Iran, while China has also urged Iran to participate in negotiations. Iran has not yet offered any comment on the proposal.

Oil prices fell, and stocks rose. Since the outbreak of the conflict more than three weeks ago, gold price moves have largely tracked the stock market, moving in the opposite direction to crude oil prices. Elevated energy prices have intensified inflation risks, leading investors to bet that the Federal Reserve and central banks in various countries will keep interest rates unchanged or even raise them, which is a negative for non-yielding gold.

The sell-off in global stocks and bonds has also forced investors to cut back their gold positions to raise cash, further magnifying the decline in gold prices.

Mark Haefele, Chief Investment Officer of UBS Global Wealth Management, wrote in a report on Wednesday that falling investor positioning, reduced Middle East buying, and expectations of rate hikes have all weighed on gold prices. “Some of these factors may reverse in the coming months, so we believe the current gold price pullback is an opportunity to add positions.”

Because the details of the U.S. proposal are still unclear, and Iran continues overnight to launch missile and drone attacks against Gulf Arab countries and Israel, the market remains tense. Meanwhile, according to people familiar with the matter, the Trump administration plans to deploy soldiers of the 82nd Airborne Division to the Middle East.

The Central Bank of Turkey is also preparing to expand its policy tools to shield the lira from volatility related to the war, including by using its large gold reserves. People familiar with the matter said the bank has been discussing the possibility of conducting gold-for-foreign-exchange swap transactions in the London market.

It is not uncommon for central banks to sell spot gold and simultaneously agree on future repurchase operations. With this approach, central banks only need to pay a small premium to repurchase the gold a few months later, thereby securing dollar financing at a lower cost; the premium level is typically comparable to interbank borrowing costs.

OCBC Bank strategist Christopher Huang said that such operations do not represent the liquidation of reserve assets. “In fact, using gold-for-foreign-exchange swaps highlights gold’s role in reserve management.”

Since 2022, central banks around the world have greatly increased their gold holdings, which has been a key driver of gold’s multi-year bull market, although the pace of gold buying has slowed after entering this year.

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Editor: Guo Mingyu