Gold prices surged nearly 2 per cent on Monday, climbing to a one-week high, as a sharp decline in the US dollar and falling oil prices following a breakthrough peace agreement between Washington and Tehran boosted demand for the precious metal.

Spot gold rose 1.8 per cent to $4,297.42 an ounce in early Asian trade, its highest level since June 9, while US gold futures for August delivery gained 1.9 per cent to $4,318.10.

The rally came after US and Iranian officials announced they had reached a framework agreement aimed at ending months of conflict, reopening the Strait of Hormuz and lifting the US blockade on Iran. Pakistani Prime Minister Shehbaz Sharif said the agreement is expected to be formally signed in Switzerland on Friday.

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Dollar slides, oil tumbles
The peace breakthrough triggered a broad market reaction. The US dollar fell to a 10-day low against major currencies, while Brent crude and US crude prices dropped more than 4 per cent amid expectations that Iranian oil exports could return to global markets and ease supply concerns.

A weaker dollar typically makes gold cheaper for holders of other currencies, increasing international demand for the bullion. The dollar index slipped below the 100 mark, helping support gold prices despite an improvement in overall market sentiment.

Inflation fears ease
Gold’s advance also reflected changing expectations for inflation and monetary policy.

The US-Israeli conflict involving Iran had previously pushed oil prices sharply higher, fuelling concerns that inflation would remain elevated and force central banks to keep interest rates higher for longer. Those fears have now eased as traders anticipate lower energy costs if the Strait of Hormuz reopens and oil flows normalise.

Market participants have consequently reduced bets on further Federal Reserve tightening later this year. Lower expectations for interest rate increases generally benefit gold because the metal does not offer a yield and becomes more attractive when borrowing costs are expected to remain stable.

Bullion rebounds after recent weakness
The latest rally marks a sharp turnaround for gold, which had come under pressure in recent weeks as soaring oil prices and expectations of higher US interest rates weighed on investor sentiment.

Earlier this month, gold touched a six-month low as traders worried that the conflict in West Asia would keep inflation elevated and prompt more aggressive monetary tightening. The metal had fallen significantly from its January record highs before recovering on hopes of a diplomatic resolution.

Courtesy: AOJ DESK NEWS