Gold and silver surged on Tuesday as safe-haven demand picked up, benefiting the precious metals.
However, gold fell 13% in March, and was headed for its steepest monthly decline since 2008.
The decline was exacerbated by rising energy prices, which raised concerns about higher inflation and elevated interest rates.
In contrast, Brent crude oil was on course to end March with the sharpest monthly gains ever.
However, prices were slightly lower on Tuesday, driven by investors considering two opposing factors: the possibility of US President Donald Trump ending the Iran war, and potential supply shocks resulting from an extended closure of the Strait of Hormuz.
Additionally, aluminium is set to achieve its most significant monthly gain in nearly two years.
This surge is attributed to the conflict in the Middle East, which has disrupted supply lines and caused damage to local production infrastructure.
Gold climbs over 1%
The prospect of the Middle East war between the US and Iran ending eased concerns about higher inflation, which buoyed gold prices on Tuesday.
While the US dollar retreated slightly, which further supported gold prices, the greenback is still set for a monthly increase.
A stronger dollar impacts gold prices; as the dollar rises, greenback-denominated gold becomes more costly for those holding other currencies.
Gold prices are experiencing their sharpest monthly drop since October 2008, having fallen by over 13% since the beginning of the month.
The decline in 2008 was a consequence of the Lehman shock, which led to a major financial and economic crisis.
“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,” Carsten Fritsch, commodity analyst at Commerzbank AG, said in a report.
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, lower oil prices also made interest rate cuts appear more likely. However, gold and oil prices rose over the last two trading days.
“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,” Fritsch added.
Gold is likely to rise alongside oil prices, in contrast to recent weeks, provided markets ignore serious Federal Reserve rate hike talk, Fritsch said.
At the time of writing, gold on COMEX was at $4,640.40 per ounce, up 1.8%, while silver was 4.5% higher at $73.77 per ounce.
Brent set for steepest monthly gain
Oil prices eased slightly on Tuesday, even though the market remained highly volatile as US President Trump reportedly told allies that he was contemplating ending the Iran war.
However, Brent crude prices were on course for their steepest monthly gain ever.
Trump stated that Iran’s leadership agreed to allow 20 cargo ships through the Strait of Hormuz. Furthermore, an Iranian news agency reported that the parliament had passed a bill to impose transit fees. These developments suggest a potential partial reopening of the strait.
“Still, there would likely remain a supply gap of several million barrels per day, and the question would arise as to how this could be closed in the long term,” Thu Lan Nguyen, head of FX and commodity research at Commerzbank, said.
Therefore, the conclusion remains: As long as the Strait of Hormuz is not fully reopened, a risk premium on oil prices is justified.
Front-month Brent futures are poised for an unprecedented 58% monthly increase, marking an all-time record dating back to LSEG data from June 1988.
Similarly, West Texas Intermediate is seeing its largest jump since May 2020, with a 54% rise.
On Tuesday, speaking on Truth Social, Trump suggested that countries that did not assist the US in its coordinated strikes against Iran and are now facing jet fuel shortages should purchase American oil. He then urged them to go to the Strait of Hormuz and “just TAKE it.”
According to a report by The Wall Street Journal, the post followed an earlier revelation that Trump had informed his aides he was prepared to halt the military action against Iran, even if it meant the Strait of Hormuz would remain largely closed, with its reopening addressed at a later time.
Furthermore, the US president had issued a warning, threatening to “obliterate” Iran’s oil wells and energy facilities unless Tehran ensured the reopening of the vital waterway.
The May WTI crude contract was last at $102.35 per barrel, down 0.5%, while Brent was up 5.18% higher at $118.62 a barrel.
Aluminium rises
The Middle East conflict has caused the largest monthly surge in aluminium prices in almost two years.
The war has disrupted supply lines and damaged regional production facilities, tightening the global market.
A significant amount—about 10%—of the world’s aluminium production is located in the Persian Gulf, and the closure of the Strait of Hormuz is severely restricting exports, according to Neil Welsh, head of metals market at Britannia Global Markets.
The global market has seen a sharp increase in aluminium premiums in various locations due to the disruptions.
This has, in turn, stimulated greater demand for Chinese products, which account for the majority of the world’s output.
At the time of writing, three-month aluminium futures on the London Metal Exchange were trading 1.2% higher at $3,474 per ton.
Following news of Iranian attacks on aluminum smelters in the UAE and Bahrain, the price of aluminum has risen again, approaching its March 12 high of just under $3,500 per ton.
“Currently, however, the focus is more on potential long-term disruptions to aluminum production,” Volkmar Baur, FX and commodity analyst at Commerzbank, said.
“Since shutting down and restarting production involves lengthy processes, an interruption in production could mean that output remains limited even after the Strait of Hormuz is reopened.”
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