Commerzbank analyst Carsten Fritsch notes Gold has dropped over 13% this month, its steepest fall since 2008, as surging Oil prices forced markets to price out Fed rate cuts. Recently, both Gold and Oil have risen together. With futures no longer discounting further cuts and hikes seen as unlikely, Commerzbank expects higher Oil to lower real yields and support Gold.

Fed expectations shift gold-oil relationship

"The gold price has fallen by more than 13% since the start of the month and is therefore on course for its sharpest monthly decline since October 2008. At that time, the price drop followed the Lehman shock, which triggered the great financial and economic crisis. This decline also deviated from traditional explanations."

"Today, the war in the Middle East and the resulting sharp rise in oil prices were the triggers for the price decline. Since the start of the Iran war, the correlation between oil prices and gold prices has mostly been negative, i.e. a rising oil price has been accompanied by a falling gold price and vice versa. The reason for this rather unusual correlation was that, as oil prices rose, inflationary risks increased, leading to the market pricing out previously anticipated interest rate cuts by the Fed."

"Conversely, when oil prices fell, interest rate cuts were again seen as somewhat more likely. Over the last two trading days, both the price of gold and the price of oil rose. As Fed funds futures no longer price in any further interest rate cuts and the market does not believe the Fed will raise rates, a further rise in oil prices would lead to lower real interest rates via higher inflation."

"As long as the market is not willing to seriously consider Fed rate hikes, the price of gold is therefore likely to benefit from rising oil prices, in contrast to recent weeks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)