Gold collapses as US-Iran strikes send Oil, US yields higher

Gold prices plummeted by over 2.30% on Tuesday in response to the intensifying Middle East conflict between the United States and Iran. The US and Iran have been exchanging strikes, while US economic data was relatively mixed and took a back seat amid heightened geopolitical tensions. At the time of writing, XAU/USD was trading at $4,342, having reached a high of $4,461.

The conflict spurred US Treasury yields higher, particularly the 10-year benchmark note, which rose nearly four basis points to 4.792%. This increase was driven by a surge in Oil prices. West Texas Intermediate reached a daily high near $90.00 per barrel, up over 4.20% from the previous level. Earlier this week, Federal Reserve Chair Kevin Warsh's hawkish remarks at the Jackson Hole speech, suggesting the central bank would take action if inflation remained high, prompted a shift in money markets.

US economic indicators released on Tuesday revealed that manufacturing sector activity cooled, with the ISM Manufacturing PMI falling to 54.6 in August, down from 55.6 in July. Job Openings and Labor Turnover Survey data showed steady hiring, with vacancies increasing to 7.217 million, slightly below forecasts of 7.3 million. The Fed's Beige Book, jobs data, the ISM Services PMI for August, and the Nonfarm Payrolls report are expected to be released in the coming days.

Technical analysis indicated that the escalation of the US-Iran conflict accelerated Gold's downtrend. XAU/USD broke below key support levels, including the $4,400 figure and the 100-day Simple Moving Average (SMA) at $4,365, fueling a breakout below $4,350. A daily close below $4,350 would signal further bearish momentum. The next technical support area is the 50-day SMA at $4,215. If Gold managed to surpass the 100-day SMA at $4,365, it could potentially reclaim the $4,400 level.

Throughout history, gold has served as a store of value and medium of exchange. Today, it is primarily viewed as a safe-haven asset, providing protection against turbulent times. Central banks hold substantial gold reserves, often diversifying their holdings to bolster currency strength and economic stability. In 2022, central banks added 1,136 tonnes of gold, the highest yearly purchase since records began.

Gold exhibits an inverse relationship with the US Dollar and US Treasuries, both of which are major reserve assets. As a yield-less asset, gold tends to appreciate when interest rates are low and decline when rates rise. However, its movement is largely driven by the behavior of the US Dollar, as it is priced in dollars (XAU/USD).