Fed Expectations Drive Gold Direction

PRECIOUS METALS

Gold: June COMEX contracts are up 1% to $4,582 following a drop to a five-week low on Monday. Today’s move higher is due to the move lower in oil prices, though persistent tensions in the Middle East continue to fuel higher inflation expectations, which is likely to keep gains in check. Since the start of the US-Iran conflict in late February, gold prices have largely moved inversely proportional to crude. Despite being a hedge against geopolitical volatility fears of a spike in inflation have lowered expectations of rate cuts, pushing gold down more than 13%.

Market expectations for Fed policy remain modestly on the hawkish side, though no change in policy is priced by markets. Gold is likely to remain sensitive to the geopolitical landscape, which in turn frames the global inflation outlook. Brent crude above $100, stalled peace talks, and persistent uncertainty on the Strait of Hormuz are likely to prevent cap gold’s upside until inflation risks ease.

Last week’s policy statement showed three members voted to remove the easing bias language in the monetary policy statement, a signal that there is growing worry on the board over the rise in inflation and a potential hurdle to future policy-easing this year. Still, longer-term inflation expectations have only shown a mild increase. TIPS markets show the 5-year breakeven at 2.72%, 10Y breakeven 2.50%, and 5y5y forward 2.28%, both the forward and the 10Y breakeven now sit at the cycle’s local highs. The 5Y/10Y BE inversion of 22 bps confirms a front-loaded inflation profile, with traders pricing the near-term tariff/services-prices impulse, while long-run expectations remain contained. With the 5y5y forward at 2.28%,  below the 2.50% de-anchoring threshold but pressing higher, the Fed retains optionality to treat near-term CPI acceleration as transitory, but the margin is shrinking.

Silver: Silver futures are up 1% to $73.86.

BASE METALS

Copper: Copper prices on the LME rebounded from a three-week low hit overnight as traders took advantage of lower prices, while US prices rose 2.5% to just below $6 on fresh speculation over tariffs on the metal. Benchmark three-month copper on the London Metal Exchange added 0.4% to $13,053; it hit its lowest level since April 13 at $12,780 earlier in the session. At large trading volume is relatively muted with the SHFE closed for the labor day holiday. The US COMEX contract is trading at a slight premium of $130 a ton over LME copper. Arbitrage is pulling metal to the US, with the Trump administration expected to decide in July whether to impose tariffs on refined copper, insulating it from some of the global risk-off pressure weighing on the LME. COMEX inventories have climbed to successive record highs, reaching 558,692 metric tons on Monday, more than doubling over the past eight months. As for the broader copper complex, higher energy prices, tighter financial conditions, and weaker industrial demand could weigh on future gains.

Zinc: Zinc rose 0.4% to $3,362.

Aluminum: Aluminum advanced 1.1% to $3,562. Fears of supply shortages have been reinforced as the standoff between the US and Iran continued, constricting shipments from the Gulf region, home to large smelters. Emirates Global Aluminum said fully restoring primary aluminum production at its Al Taweelah smelter that was hit by an Iranian attack could take up to a year. The premium of the LME cash contract to the three-month future rose 7% to $60 a ton on Friday, having more than doubled since April 17, indicating worries about short-term supply.

Tin: Tin gained 0.9% to $49,850.

Lead: Lead rose 0.8% to $1,965.

Nickel: Nickel added 0.6% to $19,475.

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