Gold (XAU/USD) traded firmer near $4,240 in early Asian dealings on Friday, rebounding from a six-month low after Donald Trump said he had cancelled planned military strikes against Iran. The BBC reported that Trump said negotiations with Tehran were taken to senior Iranian leadership and approved, while Iran said it has not yet reached a final conclusion on any agreement. The shift in perceived geopolitical risk weighed on US Treasury yields and the US Dollar (USD), lending support to the dollar-priced metal.
Attention is also on monetary policy, with the Federal Reserve expected to leave rates unchanged at Kevin Warsh’s first meeting as chair next week. Markets are pricing nearly a 67% chance of a US rate hike in December, according to the CME FedWatch tool. Elsewhere, central bank demand remains a structural feature: World Gold Council data show central banks added 1,136 tonnes of gold worth around $70 billion in 2022, the largest annual purchase on record. Elevated crude oil prices were cited as a potential constraint via inflation and the prospect of higher-for-longer interest rates.
Geopolitical Tensions and Price Action
We’ve seen gold move near $2,350 an ounce this week as geopolitical tensions simmer in both the Middle East and Eastern Europe. However, with some signs of diplomatic talks emerging, the metal has pulled back slightly. This has created a pause for traders as we assess whether the risk premium is fading or just taking a breath.
Monetary Policy, Inflation, and Market Positioning
The main headwind for gold remains the Federal Reserve’s stance on interest rates. The latest CPI data, coming in at 3.1%, was slightly hotter than anticipated, dampening hopes for an imminent rate cut. Consequently, the CME FedWatch tool now shows the probability of a September rate cut has fallen below 50%, which could limit gold’s upside.
This sticky inflation data is keeping US Treasury yields firm, with the 10-year note holding around 4.35%. A strong dollar typically follows higher yields, creating a challenging environment for gold since it’s priced in dollars. We are closely watching the DXY index to see if it can break above recent resistance, which would likely pressure gold lower.
From a positioning standpoint, we think the metal looks a bit overbought after the recent risk-driven rally. The latest CFTC data shows that hedge funds and other large speculators hold significant net-long positions in gold futures. This suggests the trade may be crowded and vulnerable to a pullback on any good economic news or de-escalation.
Despite these short-term headwinds, we see a strong underlying bid from central banks, which should cushion any significant sell-off. The World Gold Council reported that central banks, particularly the People’s Bank of China and the National Bank of Poland, added over 290 tonnes in the first quarter of 2026. This consistent buying provides a solid long-term floor for the price, making us cautious about being aggressively short.
