Gold Trapped Between Iran's Olive Branch and the Fed's Tightening Grip

Gold wavers as US-Iran deal cuts geopolitical risk, but Fed's hawkish projections and sticky inflation strengthen the dollar, weighing on bullion. Central bank buying provides a floor.

The yellow metal finds itself in an unusual tug-of-war. A diplomatic thaw in the Middle East is pulling one way, while the Federal Reserve's hawkish stance pulls the other. The result is a market that can't decide which direction to break.

The 14-point memorandum signed this week between the US and Iran opens a 60-day negotiation window, with a key provision: Tehran has agreed to allow toll-free passage through the Strait of Hormuz. Within 30 days, shipping through the strategic waterway is expected to return to full capacity. That prospect has crushed the geopolitical risk premium that had been supporting gold prices in recent weeks, as fears of an oil-supply shock recede. Lower energy costs reduce inflation pressure, which in turn dampens demand for gold as an inflation hedge.

But the relief from the Gulf is being offset by monetary policy signals from Washington. The Federal Reserve left its benchmark rate unchanged at 3.50% to 3.75% on Wednesday, as widely expected. The surprise came in the projections: half of the central bank's officials now see at least one more rate hike this year. The reasoning is sticky inflation — US consumer prices climbed to 4.2% in May, prompting the Fed to revise up its own inflation forecast. Higher rates strengthen the dollar and push bond yields up, making the non-yielding bullion less attractive relative to Treasuries. Other major central banks are also tightening, with the European Central Bank lifting its key rate by 25 basis points in June and the Bank of Japan raising its rate to 1%.

The market reaction has been split and volatile. Gold briefly dropped to $4,252 on Thursday, slipping below its 50-day moving average for the first time in weeks. It then recovered ground, with spot prices rising 1.4% to $4,317.80 an ounce on Thursday morning. US gold futures, however, gave up 1% to settle at $4,339.30. The precious metal now sits 22% below its 52-week high of $5,626.80, hit in January, and remains under its 50-day average of roughly $4,578. The relative strength index of 46 indicates the market is in neutral territory, neither overbought nor oversold.

Despite the short-term headwinds, the floor beneath gold remains sturdy thanks to relentless central bank buying. China's central bank purchased bullion for the 19th consecutive month in May, pushing its reserves above 2,300 tonnes. Global gold demand hit $193 billion in the first quarter, according to the World Gold Council. The logic behind this sovereign buying spree is straightforward: since Russia's foreign exchange reserves were frozen, many nations have been shifting to physical gold stored domestically as a safeguard against sanctions. This structural demand operates independently of the interest-rate cycle.

Wall Street’s largest institutions are not backing down from their bullish calls. JPMorgan, Goldman Sachs, and UBS all maintain year-end price targets ranging from $5,200 to $6,000 an ounce, and none has trimmed its forecast following the Fed meeting. Greg Shearer, a commodities strategist at JPMorgan, describes the current price zone as a technical no-man's land, wedged between key moving averages. He notes that as long as the support near the 52-week low of around $3,900 holds, the long-term uptrend remains intact. A break below that level, however, could trigger a chart-driven sell-off.

For now, gold is stranded between a diplomatic olive branch and the Fed's tightening grip. The next few weeks will be determined by how far the Iran détente can go — and whether the central bank follows through on its rate-hike signals.