Oil Prices And Inflation Risks
Oil prices have risen on supply concerns tied to the Strait of Hormuz. Higher oil can add to inflation worries and affect expectations for US interest rates, which can pressure non-yielding assets such as gold. CME FedWatch data showed futures pricing virtually no chance of a move at the April 28–29 FOMC meeting. It also showed a 77.5% probability the Fed will stay on hold through the end of the year. Gold is often used as a store of value in periods of stress and is also used in jewellery. Central banks added 1,136 tonnes of gold worth about $70 billion in 2022, the highest yearly purchase on record. We are seeing gold trade near $4,660 as we monitor rising geopolitical tensions in the South China Sea. The current naval standoff is creating significant market uncertainty, which is increasing demand for safe-haven assets. This situation puts gold in a strong position if the conflict escalates further.Fed Policy And Volatility Outlook
However, the latest U.S. inflation data from March showed core CPI holding at 3.1%, keeping the Federal Reserve in a cautious stance. With the Fed funds rate at 4.75%, the high cost of money makes holding a non-yielding asset like gold less attractive. This is creating a classic tug-of-war between geopolitical fear and restrictive monetary policy. For derivative traders, this means implied volatility is likely to climb in the coming weeks as uncertainty builds. The CBOE Volatility Index (VIX) has already risen to 22, reflecting broad market anxiety over the situation. We believe strategies that benefit from a large price move, such as buying options straddles on gold ETFs, could be positioned well. We saw a very similar dynamic back in 2025 during the U.S. and Iran standoff over the Strait of Hormuz. Looking back, gold surged on the initial military threats but its rally stalled as rising oil prices sparked inflation fears, limiting expectations for Fed rate cuts. That event is a key reminder of how monetary policy can act as a brake on a fear-driven rally. A major underlying support for gold is the continued strong buying from central banks. New data shows that global central banks added another 1,050 tonnes to their reserves through 2025, continuing the trend of diversification away from the dollar. While this provides a solid floor for the price, the U.S. Dollar’s reaction to the current crisis will be the key driver for gold in the short term. Create your live VT Markets account and start trading now.
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