Gold (XAU/USD) extended losses in early European trade on Wednesday, slipping below $4,450 to a fresh weekly low as higher Crude Oil prices for a third day revived inflation worries and reinforced expectations for interest rates to stay elevated. The move has favoured the US Dollar’s reserve-currency appeal during renewed Middle East tensions, pressuring the non-yielding metal. Cleveland Fed President Beth Hammack reiterated the Federal Reserve’s commitment to returning inflation to 2%, while CME Group’s FedWatch Tool shows traders pricing over a 50% chance of a 25 basis point rate rise at the December meeting, keeping US Treasury yields supported.
On the geopolitical front, US Central Command said it carried out “self-defence” strikes on Iran’s Qeshm Island, after which Iran launched missiles and drones at US facilities in Kuwait and Bahrain, with most intercepted by US and Gulf air defences; fighting between Israel and Hezbollah has also intensified. Marco Rubio said Washington will not lift sanctions in exchange for reopening the Strait of Hormuz, while Donald Trump announced an open-ended ceasefire extension and the continuation of a US blockade until talks conclude. Technically, XAU/USD remains in a downward channel below the 200-period EMA on the four-hour chart, with RSI near 46 and MACD below zero; resistance sits at $4,598.83 then $4,634.83, while support is near $4,322.55.
Geopolitical Tensions and Inflation Dynamics
We believe the rising geopolitical tensions are ironically bearish for gold in the short term, as the market is focused on the resulting inflation. The spike in oil prices is strengthening the US Dollar and reinforcing bets that the Federal Reserve will keep interest rates higher for longer. This strong dollar is currently the primary headwind overpowering gold’s traditional safe-haven appeal.
The latest US Consumer Price Index showed core inflation holding stubbornly at 3.4%, giving the Fed very little room to maneuver. With crude oil now pushing past $95 a barrel due to the Mideast conflict, we see the market’s 50% implied probability of a December rate hike as a conservative estimate. This dynamic underpins our view of continued dollar strength and pressure on non-yielding assets.
Strategy and Historical Perspective
Given the bearish technical setup within the descending channel, we are looking to buy put options on gold futures or related ETFs for the coming weeks. Any short-term rally toward the $4,600 resistance level should be viewed as an opportunity to enter new short positions. Our initial target is the lower boundary of the channel near the $4,322 support level.
Market volatility, as measured by the VIX index, has climbed to 19, but implied volatility on gold options has not yet fully reflected the growing risks. This creates a window for us to build positions using bear put spreads, which can help limit the initial cost of the trade. This strategy allows us to capitalize on a downward move while managing the risk of a sudden geopolitical de-escalation.
This pattern is reminiscent of past energy shocks, such as in the late 1970s, where the Federal Reserve’s aggressive response to inflation ultimately strengthened the dollar significantly. During those periods, the dollar’s dominance outweighed gold’s appeal as a conflict hedge. We anticipate a similar dynamic playing out over the next several weeks, making short positions on gold the more probable trade.
