As the United States launched fresh military strikes against Iran and international oil prices continued to climb, the gold market is engaged in a fierce tug-of-war around the psychological barrier of $4,000 per ounce. On one side, major institutions like Fidelity International, citing a lack of fiscal discipline and ongoing central bank purchases, are planning to increase their gold holdings again. On the other side, inflation and interest rate hike fears triggered by persistently high energy prices are repeatedly pressuring the non-yielding asset. This leaves market participants in a dilemma: which will be the dominant macro narrative for gold in the second half of the year—fear of inflation or a slowing economy?
Geopolitical Flare-Up, Gold's Rebound Proves Fleeting
The latest data shows gold prices fell by as much as 0.9% on Thursday, retreating to around $4,025 per ounce and erasing gains made earlier in the week following softer-than-expected U.S. inflation figures. The immediate catalyst for the drop was renewed escalation in the Middle East—the U.S. completed its latest strikes against Iran, with the U.S. President vowing to intensify bombing until Iran ceases attacks in the Strait of Hormuz and agrees to open shipping lanes. The interim peace agreement signed last month has effectively collapsed, pushing Brent crude oil prices higher to around $85 per barrel, with refined product prices like diesel, gasoline, and jet fuel reaching levels equivalent to about $160 per barrel.
Previously, gold had briefly surged nearly $100, reclaiming the $4,100 level, buoyed by weaker-than-expected increases in U.S. Consumer and Producer Price Indexes. Traders quickly pared back bets on imminent monetary policy tightening by the Federal Reserve. However, the rebound in oil prices and the new U.S. strikes on Iran quickly reignited concerns that high energy costs would feed back into inflation, thereby reviving expectations for further monetary policy tightening. Gold prices retreated accordingly, falling back into the wide trading range established over recent weeks.
From a longer-term perspective, gold remains in a significant correction channel after turning lower from near its all-time high of around $5,600 per ounce at the end of January. The second quarter saw a cumulative decline of 14%, the worst quarterly performance since 2013. Year-to-date, gold is down about 7%, though it remains up approximately 20% compared to the same period last year.
Inflation or Recession? Market Logic is "Split"
The current difficulty in establishing a clear directional trend for gold stems from an inherent contradiction in macro logic. In the traditional pricing framework, rising oil prices boost inflation expectations, which in turn supports U.S. Treasury yields and the dollar, increasing the opportunity cost of holding zero-yield gold. This transmission chain was evident earlier in the week when the U.S. two-year Treasury yield climbed to its highest level in over a year.
However, Ole Hansen, Head of Commodity Strategy at Saxo Bank, points out that the resilience gold has shown around the $4,000 level may suggest investors are no longer solely focused on the short-term inflationary impact of higher oil prices but are increasingly considering its long-term erosive effect on economic growth. Persistently high energy costs squeeze consumer spending, erode corporate profit margins, and dampen investment. If such recession fears ultimately outweigh inflation concerns, gold's value as a defensive asset could re-emerge as the dominant force.
Hansen believes the market is currently caught in a fierce tug-of-war between two macro themes: on one side, inflation fears, high bond yields, and a strong dollar; on the other, economic slowdown, fiscal debt issues, and currency devaluation risks. Until the situation clarifies, gold is likely to continue oscillating within the $3,950 to $4,200 range. A sustained break above $4,200 would signal the market has decisively shifted away from the inflation narrative to focus on the broader economic consequences of the energy shock. Conversely, a clear break below $3,950 would mean the inflation narrative and tightening expectations have regained full control.
Divisions within the Federal Reserve further deepen market uncertainty. The Fed Chair reiterated his commitment to restoring price stability during congressional testimony, stating that interest rates remain an option for controlling inflation but emphasizing patience would be maintained. He also dismissed suggestions that the AI investment boom is exacerbating inflation and repeatedly affirmed his independence. However, other policymakers' stances are not uniform: one Governor stated readiness to act "if we don't see inflation coming down quickly," while the New York Fed President believes the current level of interest rates is in a "good place" to achieve their goals. This mixed "hawkish-dovish" picture has made precious metals markets exceptionally sensitive to upcoming economic data and energy price movements.
Fidelity: Long-Term Bullish Thesis Intact, Awaiting Opportunity to Return to Overweight
Beyond the short-term volatility and sentiment swings, some large, long-term institutional investors are planning their moves from a longer-term cyclical perspective. Ian Samson, a multi-asset portfolio manager at Fidelity International, recently revealed that Fidelity plans to return to an overweight position in gold, with the only question being timing. Samson reduced the gold allocation in his multi-asset portfolios to neutral between January and February this year, around the time gold's multi-year bull run abruptly halted. Reflecting on this decline, gold began sliding from its near $5,600 all-time high at the end of January and accelerated its descent after the outbreak of war in the Middle East in February.
"From a tactical perspective, the bullish and bearish factors in the gold market are almost evenly matched at the moment," Samson commented, expecting gold prices to be slightly higher than current levels by year-end, with a true bull market return potentially waiting until 2027. In his view, only one scenario could substantially undermine the long-term bullish case for gold: "We go back to a world where governments rediscover fiscal discipline and central banks genuinely try to get inflation down. But I don't think we are in that macro environment."
Beyond the macro fiscal and monetary backdrop, Samson is also closely watching the subsequent trajectory of oil prices, Federal Reserve interest rate decisions, and gold's own ability to accumulate and maintain momentum. On a technical level, the 50-day moving average crossing above longer-term indicators, or a price push above $4,300 per ounce, would be seen as noteworthy early bullish signals.
Purchases from official sector entities provide a solid foundation for gold's long-term price floor. A recent survey by the World Gold Council and YouGov shows a record number of central banks plan to increase their gold holdings this year. Samson states plainly, "If you have these large-scale structural, strategic buyers, the gold price is almost inevitably pushed higher." This assessment aligns with trends in the ETF market—Saxo Bank observes that after a previous wave of liquidation, gold ETF holdings have largely stabilized, indicating the aggressive selling phase is nearing its end, even though new allocation-driven inflows have not yet arrived in force.
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