Rebounding Risk Aversion and Rate-Hike Expectations at Play: The Bull-Bear Tug-of-War Behind Gold's Rebound

Keywords: Gold rebound, Middle East tensions, Federal Reserve rate hikes, inflation concerns, safe-haven demand

Introduction

On Thursday (July 9), the international gold market saw a strong rebound, with spot gold rising more than 1.3% to a high of $4,136.24 per ounce. In the previous trading session, prices had briefly fallen to their lowest level since July 1. This rebound was mainly driven by dip buying and a renewed escalation of geopolitical tensions in the Middle East. However, the market has not shifted into a one-way bullish stance. Expectations of further Federal Reserve rate hikes remain like the sword of Damocles hanging over gold prices, limiting upside room. Next week, US inflation data and Federal Reserve Chair Wosh's congressional testimony will be the key indicators to watch, and investors are holding their breath.

1. Rising Geopolitical Tensions Boost Safe-Haven Buying

Tensions in the Middle East have continued to escalate since July began. Frictions between Iran and Israel, security risks along the Red Sea shipping lane, and potential threats to oil facilities all pose severe challenges to global energy supply. High energy prices are not only pushing up inflation expectations, but also prompting capital to rapidly shift toward safe-haven assets. As a traditional safe-haven tool, gold naturally becomes one of the first choices for funds.

The "buy the dip" strategy was fully reflected this week. After gold prices fell to a one-week low on Wednesday, bulls stepped in decisively, pushing prices back above the $4,130 level. On the technical side, strong support in the $3,900-$4,000 range provided a solid foundation for the rebound. It is worth noting that this rebound came with increased trading volume, indicating that it was not retail-driven, but rather institutional money positioning for medium-term exposure.

2. The Dual Contest Between Inflation Concerns and Rate-Hike Expectations

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The chart above shows the recent fluctuations in gold prices. Although risk aversion has driven a short-term rebound, from a medium-term perspective the Federal Reserve's monetary policy path remains the core variable. The market widely expects that if June's US Consumer Price Index (CPI), due next week, comes in above expectations again, the Fed may speed up the pace of rate hikes, thereby dampening gold's appeal as a non-yielding asset.

In fact, the pass-through effect of energy inflation is intensifying this contradiction: Middle East conflict pushes oil prices higher → inflation expectations rise → the Fed is forced into a more hawkish stance → real interest rates move higher → gold comes under pressure. This chain leaves gold caught in repeated tug-of-war between "safe-haven tailwinds" and "rate-related headwinds." Whether this week's rebound can break through the previous high of $4,136 depends largely on whether the market believes the Fed will view "energy-driven inflation" as temporary and delay further tightening.

3. The US Dollar and Treasury Yields: Gold's "External Pressure"

There is a classic negative correlation between gold and the US dollar index, as well as real US Treasury yields. Recently, the dollar index has remained range-bound at elevated levels around 105, while the 10-year US Treasury yield has hovered around 4.3%, both weighing on gold. Although Thursday's rebound has partially eased this pressure, if next week's inflation data comes in above expectations, the dollar could strengthen again and gold may face renewed short-term pressure.

It is worth noting that gold ETF holdings did not rise significantly along with the price rebound. The world's largest gold ETF — SPDR Gold Trust — saw a slight net outflow over the past week, indicating that professional investors are cautious about the rebound. This also reflects, from another angle, that the current bullish force in the market is coming more from short-term speculation and safe-haven demand rather than medium- to long-term allocation needs.

4. Market Outlook: Waiting for the "Wosh Testimony" and CPI Data

Next week's focus will center on two events: first, the June US CPI data (year-on-year growth is expected to remain around 3.1%); second, the semiannual congressional monetary policy testimony by Federal Reserve Chair Wosh (as written in the original text, likely a typo for Powell, but the original meaning is preserved). Wosh's remarks will have a direct impact on market expectations — if he insists that "interest rates need to stay higher for longer," gold may give back this week's gains; on the other hand, if he hints at the possibility of rate cuts later this year, gold could break above the $4,200 mark.

Institutional views are diverging: Goldman Sachs believes the geopolitical risk premium will support gold above $4,000, while UBS warns that if the Fed unexpectedly hikes rates by 50 basis points, gold could fall below $3,800. In the options market, two-way bets around the $4,100 level have increased significantly recently, suggesting that the market has yet to reach a consensus on a directional breakout.

Conclusion

In summary, Thursday's gold rebound was the result of both geopolitical safe-haven buying and technical repair after an oversold decline, but the "ceiling" created by rate-hike expectations remains clearly in place. In the short term, gold prices are likely to oscillate within the $4,050-$4,150 range as they build momentum and wait for guidance from next week's macro data. Investors should keep a close eye on the continued evolution of Middle East tensions — once the conflict spills over into a wider region, gold's safe-haven buying may outweigh rate concerns and drive a new leg higher. However, until clearer signals emerge, chasing the rally still calls for caution, and building positions on dips remains the more prudent approach.

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