Gold prices have fallen by more than one-fifth since the US-Iran conflict, so why are many central banks still increasing their holdings?

FastBull News, October 7—— Traders are currently pricing the probability of a rate hike in October at less than one-fifth, down from around 40% a week ago. However, tanker attacks continue and oil executives warn that emergency measures are being depleted. The Federal Reserve’s minutes of the September meeting will be released on Wednesday. Despite gold prices falling by more than one-fifth since the end of February, several central bank officials in different countries still emphasize the strategic role of gold in diversifying reserves.

Spot gold slipped slightly during the European session on Wednesday (October 7), currently trading at $4,130 per ounce. Although facing short-term pressure, the resumption of oil supply and the retreat in U.S. Treasury yields are providing some bottom support for gold prices.

Increase in Oil Supply and Decline in U.S. Treasury Yields: Easing Rate Hike Pressure

The CEO of Shell stated that Middle Eastern oil flows are about 80% of pre-conflict levels, and several major banks and shipping analysts have given similar estimates.

The resumption of supply has alleviated upward pressure on energy prices, thereby easing concerns about inflation and Federal Reserve rate hikes.

Meanwhile, U.S. Treasury yields retreated on Tuesday, after long-term yields hit multi-decade highs the previous day. The retreat in yields lowers the opportunity cost of holding non-interest-bearing gold, providing support for gold prices.

Risks Remain: Tanker Attacks Continue, Emergency Measures Exhausted

Despite the supply recovery, risks remain. Tehran has intensified attacks on tankers in the Strait of Hormuz in recent days, and key oil executives warn that as the U.S.-Iran conflict enters its eighth month, the world is running out of emergency mechanisms to manage the fallout.

This warning reminds the market that the sustainability of the supply recovery is still heavily dependent on the security situation.

If tanker attacks escalate further, oil prices may rise again, which would push up inflation expectations and have a complicated effect on gold—on one hand, safe-haven demand may rise; on the other hand, rate hike expectations could be reignited.

Federal Reserve Pricing: Probability of Rate Hike in October Less Than One-Fifth

Federal Reserve officials have consistently downplayed the necessity of an imminent rate hike.

Traders are currently pricing the probability of a rate hike at the October meeting at less than 20%, down from around 40% a week ago. This shift supports gold, as softer rate hike expectations reduce the opportunity cost of holding the precious metal.

The minutes of the Federal Reserve’s September meeting will be released on Wednesday, providing clues to the next policy steps.

If the minutes lean dovish, it may confirm the market's dovish repricing, offering further support for gold; if more hawkish, it could reignite rate hike expectations, weighing on gold prices again.

Gold’s Strategic Role: Central Banks Consider Reserve Diversification

Though gold has fallen more than 20% since the U.S.-Iran conflict broke out at the end of February, central bank officials from several countries gathering in Italy this week highlighted gold’s growing strategic role in diversifying reserves, given its increased appeal as a safe-haven asset amid rising geopolitical uncertainty.

This stance is noteworthy—it suggests that despite short-term pressure on gold prices, long-term central bank demand remains. Should geopolitical uncertainties persist, strategic allocations by central banks may provide medium- to long-term bottom support for gold prices.

Summary

The increase in oil supply in the Middle East and the retreat in bond yields have eased the urgency for a Federal Reserve rate hike this month. Shell's CEO said regional oil flows are about 80% of pre-conflict levels, with several institutions offering similar estimates. But risks remain—Tehran has stepped up tanker attacks in the Strait of Hormuz, and oil executives warn that emergency measures are running out.

Federal Reserve officials are downplaying the necessity of a rate hike, and traders now price the probability of an October hike at less than one-fifth, down from around 40% a week ago. The minutes of the Federal Reserve’s September meeting will be released on Wednesday. Even though gold prices have fallen more than a fifth since the end of February, several central bank officials emphasize its strategic role in reserve diversification.

For gold, the resumption of oil supply and falling yields provide short-term support, but continuing tanker attacks and the Federal Reserve minutes remain key variables for the metal's short-term direction. If the minutes are dovish, gold prices may rebound further; if hawkish, the pressure could persist.


(Spot gold daily chart, source: EasyBull)

As of 15:18 Beijing time, spot gold is quoted at $4,129.20 per ounce.