According to analysis from T. Rowe Price, the short-term supportive factors for gold have weakened compared to the earlier stages of its rally. While its long-term appeal remains, the current balance between risk and reward has become more even, leading the firm to adopt a more neutral tactical position on the asset. In recent years, central bank demand has been a primary driver of gold demand, but this demand appears to have moderated. Concurrently, market capital is rotating towards other areas with stronger cyclical and structural growth momentum, particularly in artificial intelligence infrastructure, which has relatively diminished gold's attractiveness in asset allocation. Consequently, sustained capital flows into AI-related beneficiaries are also boosting demand for industrial metals closely tied to this theme, such as copper, which further benefits from increased infrastructure investment in power, grids, and data centers. Meanwhile, rising real interest rates have increased the opportunity cost of holding non-yielding assets like gold. Based on these factors, T. Rowe Price has adjusted its gold allocation from an overweight to a more neutral tactical stance. Current uncertainties surrounding the Middle East conflict, energy markets, and policy outlook may limit gold's near-term upside potential. Conventional wisdom suggests that heightened geopolitical tensions should be beneficial for gold. However, Middle East tensions also push oil prices higher. Rising energy prices fuel inflation concerns, support a stronger U.S. dollar, and lead markets to anticipate that interest rates may remain elevated for longer. These factors typically create headwinds for gold. While central banks have been a significant source of demand, gold could also be sold or mobilized if some nations need to tap reserves to address financing, currency, or balance of payments pressures amid geopolitical stress. This implies that central bank support for gold may be weaker than in recent years, at least until the Middle East situation becomes clearer. Recently, gold has become increasingly sensitive to factors like oil prices and inflation that also affect broader markets, suggesting its performance may be more correlated with other assets than investors historically expected. In this context, T. Rowe Price still believes gold deserves a place in a diversified portfolio, but its role differs from that of bonds or cash. Cash and high-quality bonds now offer positive real yields—an income advantage largely absent for a long period after the financial crisis—significantly enhancing their appeal as defensive assets. Gold's value is demonstrated in other ways. It can provide portfolio diversification against unexpected inflation spikes, deteriorating fiscal conditions, reserve currency uncertainty, and broader confidence shocks. As these risks persist, the firm maintains that a strategic allocation to gold is warranted, even while adopting a more neutral tactical stance in the near term.
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