Despite near-term headwinds for gold—including high yields, dollar strength, and profit-taking—structural factors remain, maintaining the yellow metal’s long-term upward trajectory above $5,000 per ounce, according to Emily Avioli, vice president and investment strategist at Merrill Lynch.
In Avioli’s latest Capital Market Outlook for the investment giant, he noted an unexpected trend: despite rising inflation and investor concern over the Iran war, gold has not performed as anticipated.
“Instead, the yellow metal’s luster has faded, with the price tumbling by roughly -16.0% since the Middle East conflict began,” she noted.
Gold defies geopolitical hedge role
Gold has moved largely in tandem with risk assets over the past four weeks, defying its conventional role as a geopolitical hedge.
“The counterintuitive move raises the question—should investors be less bullish on bullion moving forward?”
According to Avioli, the current situation is more a result of “positioning effects, shifting interest rate expectations, and dollar dynamics” than any fundamental change in gold.
Caution in the market ahead of a US ultimatum’s expiry dragged down gold prices on Tuesday. The ultimatum warned Iran to either reopen the Strait of Hormuz or face severe attacks on its infrastructure.
Strikes against Iran intensified throughout the day. Despite this, Tehran gave no indication it would comply with US President Donald Trump’s ultimatum to open the Strait by the end of Tuesday.
Trump warned that “a whole civilisation will die tonight” if a last-minute agreement was not reached.
The recent escalation of the Iran conflict has driven a surge in oil prices, raising concerns about supply. These elevated energy costs contribute to inflation, which, in turn, restricts central banks’ capacity to lower interest rates.
Profit-taking and higher yields drive reversal
Although gold is typically seen as a hedge against inflation, its appeal diminishes in a high-interest-rate environment because it does not offer any yield.
Gold prices had climbed significantly since 2022, topping the $5,400 per ounce mark in January this year.
This sharp increase had been fueled by both heightened central bank buying and a resurgence of retail investor interest.
Historically, after large rallies in any commodity price in a short window of time, that commodity usually has a consolidation period or digestion of the abnormally large gains. This has been playing out with the current pullback in gold prices.
Avioli cited the market’s overextended positioning following the historic rally as a key factor. This led to a wave of profit-taking when risk-off sentiment increased with the outbreak of the war.
The decision to sell gold for increased liquidity might have been exacerbated by the historically low levels of institutional cash reserves, which had reached a record low in January, she observed.
Rising yields were cited by Avioli as an additional element contributing to the recent reversal in gold’s price.
Rising energy costs have heightened inflation fears, which in turn have changed the expected path for monetary policy.
Interest rate cut expectations have been delayed, with Fed funds futures even suggesting a non-negligible chance that the Federal Reserve’s next action might be an increase.
This rise in real yields has increased the opportunity cost of holding non-yielding assets like gold, making income-generating alternatives comparatively more attractive, Avioli noted.
Market attention is currently fixed on several upcoming economic data releases this week. Specifically, the minutes from the Federal Reserve’s March meeting are scheduled for release on Wednesday.
Following that, Thursday will bring the US Personal Consumption Expenditures data, and the week will conclude with the Consumer Price Index data due out on Friday.
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