Gold climbs to a four-week high as markets await a Strait of Hormuz agreement

Gold prices rose 2.5% during European trading on Wednesday, extending gains for a third consecutive session and reaching their highest level in four weeks, supported by stronger demand for the precious metal, a weaker US dollar, and lower oil prices as the United States and Iran moved closer to an agreement on the Strait of Hormuz.

Investors are also awaiting additional key US labor market data this week, which could provide clearer signals on the future path of Federal Reserve monetary policy and the timing of any policy moves.

The Price

• Gold rose 2.5% to $4,179.58 per ounce, its highest level since July 7, after opening at $4,077.22 and touching an intraday low of $4,065.55.

• At Tuesday's settlement, gold gained 0.55%, marking its second consecutive daily advance, supported by easing tensions between the United States and Iran.

US dollar

The US Dollar Index fell 0.15% on Wednesday, extending losses for a second straight session as the greenback continued to weaken against a basket of major currencies.

A weaker US dollar makes dollar-denominated gold more attractive to holders of other currencies, helping to boost demand.

The dollar's decline comes as market sentiment improves following reports that the United States and Iran are nearing an agreement that would fully reopen the Strait of Hormuz to international shipping.

Oil prices

Oil prices fell more than 0.5% on Wednesday, extending losses for a second consecutive session and hitting their lowest levels in three weeks as concerns over global supply disruptions eased amid expectations that the Strait of Hormuz could soon reopen and military strikes between the United States and Iran remain suspended.

Lower oil prices also reduce inflation concerns, reinforcing expectations that major central banks could leave monetary policy unchanged for an extended period this year.

Developments in the Iran conflict

• The United States and Iran are reportedly close to signing a temporary agreement, brokered by Oman, aimed at reopening the Strait of Hormuz and ensuring uninterrupted energy supplies.

• Washington and Doha both announced progress in mediation efforts, with proposals continuing to be exchanged between intermediaries and Iran.

• Tehran said discussions with Oman over navigation through the Strait of Hormuz were advancing, while denying that any direct negotiations with the United States were taking place.

• Reports indicate that Iran is considering allowing European countries to remove naval mines from the Strait of Hormuz.

• Most expectations point to a breakthrough on easing the crisis and reopening the Strait of Hormuz as early as Wednesday or Thursday.

• US President Donald Trump described the current negotiations as Iran's "last chance" to reach a settlement ending the conflict that has continued for five months.

• Iranian President Masoud Pezeshkian said Iran is defending its borders and has no intention of expanding the war.

US interest rates

• Philadelphia Federal Reserve President Anna Paulson said she remains "open-minded" about the outlook for monetary policy, noting that future conditions could still require higher interest rates.

• According to CME Group's FedWatch Tool, the probability of the Federal Reserve leaving interest rates unchanged at its September meeting has risen from 35% to 43%, while the probability of a 25-basis-point rate hike has fallen from 65% to 57%.

• For the December meeting, the probability of no change has increased from 14% to 18%, while the likelihood of a 25-basis-point rate increase has eased from 86% to 82%.

• Investors will continue to monitor incoming US economic data and comments from Federal Reserve officials to reassess the outlook for monetary policy.

• Additional key US labor market data are due this week, including the July ADP private payrolls report later on Wednesday, weekly jobless claims on Thursday, and the July nonfarm payrolls report on Friday.

Economic Outlook

We expect gold to continue breaking out of its recent trading range, supported by a weaker US dollar and lower oil prices as reports suggest the United States and Iran are nearing an agreement.

If inflation concerns continue to fade and upcoming US labor market data show further signs of weakness, additional pressure on the US dollar could provide further upside for gold and other precious metals.

SPDR Gold Trust

Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, increased by 3.43 metric tons on Tuesday, lifting total holdings to 1,009.30 metric tons after rebounding from 1,005.87 metric tons, the lowest level since July 17.