Lower Oil Prices Lend Support For The Gold Rally

Oil prices fell for a second week running thanks to optimism surrounding renewed U.S.-Iran diplomacy to reopen the Strait of Hormuz. U.S. President Donald Trump announced on Monday that talks between Washington and Tehran would resume l, adding that U.S. allies in the region, including Saudi Arabia, had urged him to suspend attacks. Iran and Oman have managed to reach a preliminary agreement on geographic coordinates for a temporary, partial shipping route through Hormuz, easing immediate supply fears. However, oil prices managed to snap their recent downtrend, with Brent crude for October delivery gaining over 4.5% by early evening on Thursday. Still, oil prices remain nearly $20/bbl below their July 23 peak above $100/bbl in the aftermath of the collapse of 60-day ceasefire between the U.S. and Iran. And, there's no shortage of catalysts keeping a lid on oil prices. The International Energy Agency IEA has revised global oil demand in 2026 downwards by roughly 1.1 million barrels per day thanks to demand destruction amid higher oil prices. Months of acute shipping bottlenecks and physical supply disruptions in the Middle East have weighed down industrial activity, triggering a significant pullback in fuel consumption, particularly across Asian markets. Meanwhile, OPEC recently approved a final quota increase of 188,000 barrels per day for September 2026, concluding the phased rollback of the 1.65 million barrels per day voluntary supply cuts first agreed in 2023. Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Algeria and Oman all agreed to the September boost following a virtual meeting. This marks the sixth straight monthly increase this year, finishing the total unwinding of the 2023 voluntary reductions. However, a separate layer of 2 million barrels per day in cuts implemented back in 2022 remains active through the end of the year. The alliance is currently auditing member production capacities as it looks to set new quotas for upcoming 2027 output talks, with the likes of Iraq pushing for higher limits. Related This Megaproject Could Keep Brazil's Oil Boom Running Deep Into The 2030's Talks of oil market oversupply are also resurfacing. Last month, the U.S. Energy Information Administration EIA forecast that reopening the Strait of Hormuz coupled with rising production will slow inventory draws in late 2026 and eventually push the global market into oversupply by 2027. The EIA sees Brent crude averaging just $65/bbl in 2027, nearly $20/bbl lower than current oil prices. That said, safe haven investors are hardly complaining. Gold and silver are at a crossroads, torn between geopolitics and Federal Reserve monetary policies. While heightened geopolitical tensions traditionally drive safe-haven demand into bullion, the war has stoked inflation fears at the same time. This has left traders weighing the protective appeal of precious metals against the rising opportunity cost of holding non-yielding assets in a high-interest-rate environment. The Middle East conflict has repeatedly triggered spikes in oil prices. Higher energy costs worsen global inflation expectations, prompting a hawkish stance by the Federal Reserve that threatens prolonged or additional rate hikes. Because gold and silver yield no interest, high real yields and a strong U.S. dollar tend to suppress safe-haven upside. On the other hand, falling oil prices help support gold rallies by easing inflation fears and encouraging central banks to lower interest rates. When crude oil prices drop, the cost of manufacturing and transport goes down, which cools broader economic price pressures. To wit, spot gold has surged over 4% to trade near $4,250-$4,270 per ounce, gaining roughly 6% this week alone. The sharp rebound is directly linked to the pullback in crude oil prices. Meanwhile, the stabilization of energy markets has weighed on the U.S. Dollar. A softer dollar makes gold cheaper and more attractive for foreign buyers buying in non-US currencies. Global central banks, especially in Asian markets like China, continue to aggressively purchase gold, adding a record 289 metric tons in Q2 2026 alone, in a bid to diversify their reserves away from the U.S. dollar and sovereign debt. Beyond oil, weaker-than-expected US macroeconomic data, including soft ADP private payrolls, slowing job openings, and dipping factory orders, have simultaneously reduced the probability of an aggressive Fed rate hike in September. For investors wondering whether the latest rally has already run too far, at least some gold bulls believe the recent breakout is a signal to increase exposure rather than take profits. Florian Grummes, founder and managing director of Midas Touch Consulting, told Kitco News this week that he has increased his invested position from 50% to 80% after spending the past six months largely on the sidelines. "I've been taking a break basically for the last six months, and I think it's time to be really invested and be bullish again," Grummes said. Still, Grummes is not expecting gold to immediately return to its January record of $5,589.38. He sees gold reaching $4,500 this summer, with $4,800-$4,900 possible if it clears resistance around $4,490, but does not expect a new all-time high this year. That leaves his outlook decidedly bullish from current levels, but far less bullish than forecasts calling for an immediate return to record territory.By Alex Kimani for Oilprice.com