"Strait 'Rashomon' boosts rate hike bets, hedge funds' gold long positions fall to 115,000 contracts"

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The conflict between the US and Iran continues to escalate, rate hike expectations are reignited, and gold comes under pressure and falls back.

Over the weekend, the US and Iran launched strikes against each other once again. The navigation status of the Strait of Hormuz has fallen into uncertainty—Iran claimed the waterway would be "closed until further notice," but the US immediately denied this statement. Energy prices responded by rising rapidly, and market concerns about the Federal Reserve being forced to maintain high interest rates to curb inflation significantly increased. Gold prices on Monday fell by as much as 1.4%, to around $4,060 per ounce, a daily drop equivalent to last week's total weekly decline.

The resurgence of rate hike risks casts a shadow over the short-term outlook for the gold market. The Federal Reserve's June meeting minutes released last week showed that a minority of officials have put forward arguments in support of raising rates, though the final decision was to hold steady. Meanwhile, this Tuesday, Federal Reserve Chair Walsh will attend a Congressional hearing for the first time, and earlier in the day the June Consumer Price Index (CPI) will be released. These two major events may jointly influence the policy direction for July.

Strait Dispute Ignites Energy Inflation Expectations

According to CCTV News on Sunday, US Central Command stated that at 7:15 pm Eastern time on the 11th, the US military began its third round of strikes against Iran this week. The statement claimed that previously, Iran's Islamic Revolutionary Guard Corps had attacked a Cyprus-flagged container ship passing through the Strait of Hormuz. Regarding the openness of the Strait of Hormuz, the US and Iran each gave their own statements, and the market immediately priced in the risk of energy supply interruptions.

The inflationary pressure caused by rising oil prices is directly transmitted to interest rate expectations. The Federal Reserve's June meeting minutes indicate that while concerns over the labor market have slightly eased, officials' vigilance over inflation is rising. A high interest rate environment directly suppresses precious metals, which do not generate interest income.

Vantage Markets analyst Hebe Chen in Melbourne said: "The reignited geopolitical tensions are impacting the already fragile gold market. Unless there is substantial easing in the Hormuz situation, high oil prices, strong yields, and a firm dollar will keep gold prices under pressure this week."

Gold Prices Have Fallen Over 20% from Their Highs

Since the outbreak of the war in Iran at the end of February this year, gold has dropped more than one-fifth, ending a three-year bull market—large-scale profit-taking once pushed gold prices below $4,000 for the first time since last November.

On Monday morning, spot gold fell 1.1% to $4,073 per ounce; silver fell 1.8% to $58.82 per ounce; platinum and palladium also weakened together; Bloomberg’s Dollar Spot Index rose 0.2%.

It is worth noting that despite the clear downward trend in gold prices, there is so far little evidence that investors are establishing large-scale short positions to bet on further declines, and the market has yet to form a systemic consensus on short-selling.

Hedge Fund Long Positions Down to 115,000 Contracts

According to US Commodity Futures Trading Commission (CFTC) data, for the week ending July 7th, COMEX gold speculators’ net long positions decreased by 1,964 contracts to 114,854 contracts, dropping to about 115,000 contracts and continuing the recent trend of position reductions.

Other precious and industrial metals saw reductions as well: COMEX silver speculators’ net long positions fell by 616 contracts to 12,131 contracts; copper’s speculative net long positions fell by 970 contracts to 60,397 contracts. Overall, speculative funds in the commodity market are in a state of cautious contraction, waiting for further clarity on geopolitical developments and macro policy direction.

This Tuesday, Walsh’s Congressional debut and the June CPI data will be released on the same day. The market will look for more clues about the Federal Reserve’s July decisions from these events, and the movement of gold will largely depend on the signals released by these two major events.

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