Commodities Market Faces Significant Decline Amid U.S.-Iran Tensions

Impact of U.S.-Iran Relations on Commodities

By Naveen Thukral

Precious Metals and Oil Prices

SINGAPORE, Feb 2 (Reuters) - Commodities markets slumped on Monday as a de-escalation of tensions between the United States and Iran propelled steep losses in oil, while gold and silver tumbled for a second straight session after CME Group said it would raise margin requirements.

Market Reactions and Future Outlook

The selloff was unleashed by President Donald Trump's choice on Friday of Kevin Warsh for the next U.S. Fed chair, a move that sent precious metals sharply lower. Gold and silver had jumped 30% and 71% to record highs in January before the downturn.

Energy Market Dynamics

U.S. equities were pressured early as investors ditched other assets to cover precious metals losses, but absorbed the blow to end higher while the dollar rose.

Industrial Metals Demand

Gold was down nearly 4% on Monday after hitting its lowest in four weeks, while silver fell nearly 5%. Oil settled over 4% lower, easing from multi-month highs, and London Metal Exchange copper fell 4%.

On Friday, Trump named Warsh, a former governor of the Federal Reserve, to succeed Jerome Powell as head of the central bank in May. The choice sparked selling across financial markets. 

Trump's choice of Warsh upended the idea that Powell's replacement would push for aggressive monetary easing and lifted the dollar, which, when it rises, makes commodities more expensive for holders of other currencies, hitting demand. [USD/]

Though he now advocates for rates to be lowered, Warsh had a reputation as an inflation hawk in his earlier stint at the Fed.

A hawkish Fed signals interest rates will stay higher for longer, supporting the dollar and raising the opportunity cost of holding gold and silver, dimming their appeal.

"A stronger U.S. dollar is also adding pressure on precious metals and other commodities, including oil and base metals," said Vivek Dhar, a commodities strategist at Commonwealth Bank of Australia.

PRECIOUS METALS SELLING ACCELERATES ON MARGIN HIKES

The decline began on Friday, with the steepest one-day drop in spot gold since 1983, for a fall of more than 9%, while silver plunged 27% in its largest daily decline on record.

Selling in precious metals accelerated as CME Group hiked margins on its metal futures, with effect from Monday's market close. [GOL/]

An increase in margin requirements is generally negative for affected contracts, as the higher capital outlay can dampen speculative participation, reduce liquidity, and push traders to unwind positions.

"The scale of the unwind unfolding in gold today is something I haven't witnessed since the dark days of the 2008 global financial crisis," said IG market analyst Tony Sycamore.

Energy markets came under pressure on Monday from milder U.S. weather and signs of de-escalation in U.S.-Iran tensions after Trump's weekend comments that Iran was "seriously talking" with Washington, easing fears of conflict with the OPEC member. [O/R]

Those comments, along with reports that the naval forces of Iran's Revolutionary Guards have no plans for live-fire exercises in the Strait of Hormuz, are signs of de-escalation, Sycamore added.

Copper and iron ore markets faced headwinds amid worries over high inventories and subdued demand in the run-up to this month's Lunar New Year break in China, the world's biggest buyer of industrial and bulk metals. [MET/L] [IRONORE/]

The end-user demand and transactions are expected to be sluggish before the holiday, which starts on February 15, analysts said.

In other commodities, Chicago wheat shed 2% as the dollar firmed. Weaker energy prices weighed on corn and soybeans, both key feedstocks for making biofuels.

"The key question is whether this marks the start of a structural downturn in commodity prices or merely a correction," said CBA's Dhar.

"We see it as a correction and a buying opportunity rather than a fundamental shift."

(Reporting by Naveen Thukral, Pratima Desai and Karl Plume; Additional reporting by Ankur Banerjee and Amanda Cooper; Editing by Clarence Fernandez and Joe Bavier, Editing by Franklin Paul)