Starting Point: Where to Begin?
From last Friday, gold has initiated a fresh rally, with substantial capital both domestically and internationally pouring into gold ETFs and futures markets. Simultaneously, the ongoing US-Iran conflict has intensified rather than diminished, with Houthi militants threatening to further blockade the Bab el-Mandeb Strait, exacerbating the crude oil supply crisis. This has created a rare market scenario where gold, the US dollar index, US Treasuries, and crude oil are all rising concurrently. This analysis will dissect the underlying reasons for gold's current upswing, examining both fundamental and capital flow factors.
Is Gold's Defensive Attribute Returning?
Gold has been universally recognized as a hard asset with strong defensive qualities since ancient times. However, since the US-Iran conflict began, gold's traditional safe-haven appeal has notably weakened, with prices oscillating lower amid escalating geopolitical risks. The root cause is that this round of US-Iran tensions directly threatens global crude oil supply, driving up oil prices and intensifying upward inflationary pressure. This forces the market to raise expectations for Federal Reserve interest rate hikes, leading to a simultaneous strengthening of US Treasury yields and the US dollar. As a non-yielding asset, gold's opportunity cost of holding it has significantly increased, making interest-bearing dollar assets the preferred safe haven for capital, thereby diminishing gold's defensive role.
A review of events since last Friday shows the US-Iran conflict is still intensifying. Consequently, on July 22, Brent crude oil futures settled up $3.06, or 3.36%, at $94.07 per barrel, hitting an intraday high of $95.47, the highest level since June 11. Rising oil prices are likely to worsen the US inflation crisis, pushing the US dollar index above the 101 mark.
From this perspective, the logic behind the weakening of gold's defensive properties still holds.
So, what is actually supporting the rise in gold prices?
Examining the Capital Flow Situation
On July 22, holdings in the SPDR Gold ETF increased by 8.85 tons compared to last Friday. Gold futures on the Shanghai Futures Exchange saw an increase of 12 tons, and domestic gold ETF fund units grew by 312 million shares. While total COMEX gold open interest data has yet to be released, significant increases are also anticipated.
Gold's current price is at a relative historical low after a deep correction within the year, compounded by continued bargain-hunting from global central banks providing physical support. This gives gold decent allocation value. In the short term, gold has regained favor from safe-haven capital, a phenomenon that hasn't been clearly observed for several consecutive months.
Overall, the fresh buying wave in gold is driven by two main logics. First, the market believes the price decline over the past few months has been sufficient, creating room for a phased recovery in precious metals. Second, ongoing tensions in the Middle East are elevating uncertainty and spreading risk premiums outward. Apart from the US dollar and US Treasuries, capital is beginning to reallocate to traditional safe-haven assets like gold.
But, can this allocation-driven rally, which defies fundamental logic, be sustained?
Outlook for the Future
This price surge lacks fundamental support and is being driven by capital flows. If capital inflows falter, the rise in gold prices would be like a castle in the air.
From a technical perspective, on July 22, London spot gold staged an oversold rebound from the support level of $4,070. The daily candlestick closed with a solid bullish body and moved above the 10-day moving average. The 5-day and 10-day moving averages formed a short-term bullish crossover. The RSI quickly rose from oversold territory, and the MACD's red bars narrowed and turned positive. However, after surging to the resistance level of $4,166, an upper wick appeared, suggesting short-term bullish momentum is nearly exhausted. Before noon on July 23, gold opened higher but traded lower in a high-level consolidation, pulling back to consolidate above the 10-day moving average of $4,110. On the 4-hour chart, the MACD red bars continue to shorten, indicating a potential bearish crossover, and the RSI has fallen back to the neutral zone. This represents a technical pullback driven by profit-taking after yesterday's sharp rally. The overall structure over the two days is a pulsed, oscillating pattern of a low-level rebound followed by resistance consolidation. The $4,166 level constitutes strong short-term resistance, while $4,100 is the near-term bull-bear divide.
In the short term, close attention should be paid to the US-Iran situation and the upcoming Federal Reserve interest rate decision next week. If the strait remains blocked, keeping oil prices elevated, and the Fed maintains a hawkish stance, the gold rebound is unlikely to be sustainable. Gold may face further downward pressure in the future.
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