(Aug 5): Gold hit a four-week high as the prospect of an interim deal to reopen the Strait of Hormuz eased concerns about the outlook for inflation and reduced the odds of the Federal Reserve raising interest rates.

Bullion gained as much as 2.5% to US$4,179.53 an ounce, the highest intraday price since July 7, while silver also surged. US President Donald Trump told reporters in Los Angeles on Tuesday that talks with Iran were “moving along very nicely”, while Axios reported Washington, Tehran and Oman were close to a deal, with the US targeting an announcement later Wednesday.

Markets are now fully pricing in a single US rate increase by year end, down from two as recently as last week. Less monetary tightening is generally positive for precious metals including gold, which generate no yield.

Gold has fallen by more than a fifth since the US-Iran war began in late February. The conflict has sent energy prices soaring, stoked inflationary pressures and raised the likelihood that rates will stay higher for longer. Still, Fed officials opted to keep policy unchanged for the fifth straight time when they met last week, although three dissenters favoured a hike.

Philadelphia Fed president Anna Paulson, who voted with the majority, said in an essay Tuesday she was “keeping an open mind” on the future direction of policy as there were conflicting signs on whether it’s restrictive enough.

Separately, the Fed’s Bank of Kansas City president Jeff Schmid suggested higher rates were needed to achieve the Fed’s price-stability goals, according to remarks prepared for an event in Omaha. Schmid, who does not vote on decisions this year, cautioned against assuming that inflation pressures stemming from supply shocks would be fleeting.

Spot gold traded 2.4% higher at US$4,175.97 an ounce at 3.02pm in Singapore. Silver added 3.8% to US$61.84 an ounce. Platinum and palladium also jumped. The Bloomberg Dollar Spot Index, a gauge of the US currency, edged lower.

In recent weeks, some support for bullion has emerged from Chinese institutional investors, who have helped to arrest the war-led decline and keep prices above the key US$4,000-an-ounce threshold.

Gold-backed exchange-traded funds in China saw 14 straight days of inflows up to Monday, the longest streak since March, according to calculations by Bloomberg. That may show a shift in sentiment in the world’s biggest bullion market after a long run of outflows and price declines.

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