Gold jumps as oil slumps on Iran diplomacy hopes, an early test of Citi’s thesis

Oil is now the lead indicator for gold, with any further slide in crude likely to extend bullion’s gains through softer inflation expectations and a weaker dollar. The gap between that move and still-firm Fed hike pricing is the key tension: if rate markets start to follow oil lower, gold has room to run, but if they hold, the rally may stall. For energy traders, a 9% drop in Brent on diplomacy hopes alone shows how much risk premium remains in the price, and how quickly it could return if talks falter. The dollar’s slide adds a second tailwind for gold that may persist if US political uncertainty weighs on the currency.Newswire cut: Gold rose about 3.3% to around $4,060, its biggest daily gain since August, as Brent fell about 9% on hopes of Iran diplomacy after the US midterms, in line with Citi’s view that de-escalation, not escalation, is what drives bullion higherOne-line wrap: Gold finally got the oil slump Citi said it needed, but the Fed has not yet played its part.Summary:Spot gold rose about 3.3% to around $4,060 an ounce, its biggest daily gain since AugustBrent fell about 9% to roughly $94.50, its lowest since early September, on hopes of Iran diplomacyThe dollar fell to a one-month-plus low and Treasury yields eased after Democrats won CongressCiti’s Max Layton has argued lower oil could flip the Fed to cuts and revive gold’s rally, with targets of $4,500 and $5,000Markets still price about an 83% chance of a December Fed hike, per CME FedWatchUS payrolls and Iran talks are the next tests Gold posted its strongest daily gain since August on Wednesday as oil prices slumped on hopes of a diplomatic path on Iran, offering an early test of Citi’s view that de-escalation, rather than escalation, is what bullion needs to rally.Spot gold rose about 3.3% to around $4,060 an ounce, recovering further from a low near $3,870 on October 30. The move came as Brent crude fell about 9% to roughly $94.50 a barrel, its lowest since early September, and US crude dropped to around $88. The dollar slid to its weakest level in more than a month and Treasury yields eased. Gold up and oil down is continuing in Asia trade. The shift followed Democrats winning control of both chambers of Congress in the US midterm elections, a result that raised hopes for a diplomatic approach to the conflict with Iran. President Trump said the US had no immediate plans for military action, and Qatar stepped up mediation efforts. An Iranian official cautioned, however, that Tehran and Washington remained far from an agreement.The pattern matters because of how gold has traded through the war. Rather than rallying as a haven, it has tended to fall when tensions rose, as higher oil prices fed inflation fears and kept the Federal Reserve leaning toward tighter policy. Wednesday’s session ran that chain in reverse: lower oil, a weaker dollar and softer yields all supported bullion.That is the scenario Citi set out in a recent note. Max Layton, the bank’s global head of commodities research, said much lower oil prices could prompt the Fed to shift from hiking to cutting rates, lifting investment demand for gold and reviving a momentum-driven rally. Citi has set a 0-3 month target of $4,500 an ounce and a 6-12 month target of $5,000, assuming the Strait of Hormuz reopens and the conflict de-escalates by year-end.The Fed side of that equation has not moved yet. Futures markets were still pricing a high probability of a December rate hike, with CME’s FedWatch tool showing about 83%. Without a change in that outlook, the rally rests on lower oil and a softer dollar rather than an actual shift in policy expectations.US payrolls data are the next test, alongside any concrete progress in talks with Iran. A durable fall in oil that begins to pull Fed pricing lower would strengthen the case Citi is making; a renewed flare-up in the region would likely reverse it.  This article was written by Eamonn Sheridan at investinglive.com.