Gold's performance this year has been volatile and unpredictable. The conflict in the Middle East failed to solidify its role as a safe-haven asset, while a hawkish Federal Reserve stance has suppressed ETF buying interest, even as consistent central bank purchases provide underlying support. Now, with signs of de-escalation in the Middle East, the market is reassessing: what will dictate the next move for the gold price?
According to market analysis, Morgan Stanley commodity strategist Amy Gower identifies oil prices, the Federal Reserve's policy path, and ETF fund flows as the three core variables currently determining gold's trajectory.
In a recent report, she wrote: "De-escalation in the Middle East is supportive for gold, but a more hawkish Fed presents a challenge, particularly for ETF buying. We still see upside risks for gold, but our $5,200 per ounce forecast becomes harder to achieve without ETF participation."
In other words, while global central bank buying can provide a price floor, ETF flows are the crucial capital needed to push prices higher. Without a return of ETF investment, gold may remain resilient, but the path to $5,200 per ounce becomes narrower.
De-escalation in the Middle East is Supportive, but the Logic Isn't 'Safe-Haven'—Oil Prices are Key
Many assume that escalating Middle Eastern tensions would boost gold prices, but in this recent conflict, gold's safe-haven properties were barely realized.
During the conflict, gold did not fully play its traditional safe-haven role. The reason is that this shock was more of a "supply shock": rising oil prices push up inflation expectations and bond yields, and higher yields themselves tend to suppress gold.
The conflict also introduced two specific pressures: first, rising bond yields; second, increased fiscal and external pressures for oil-importing nations, leading some countries to sell gold reserves, with Turkey cited as an example.
Therefore, a cooling of Middle East tensions is not necessarily negative for gold. If oil prices are lower than previously expected, inflationary pressures ease, reducing the pressure on central banks to tighten monetary policy or sell gold. Under this logic, "de-escalation" actually removes a headwind for gold.
Central Bank Buying Persists, But It Can't Complete the Final Leg for ETFs
Official sector demand remains one of the strongest supports for gold.
The latest central bank survey from the World Gold Council shows a record 45% of respondents expect to increase their gold reserves over the next 12 months. This indicates that central bank gold buying is not a short-term sentiment trade but rather a longer-term strategic allocation.
This provides a meaningful floor for gold prices but is not the complete answer. Central bank buying can offer support during price pullbacks but may not be sufficient alone to drive gold towards $5,200 per ounce. Reaching that level requires the renewed participation of ETF funds.
Demand from India, meanwhile, shows signs of cooling. Data indicates a slowdown in India's gold imports, following an increase in import duties in May aimed at curbing purchases. Physical demand is not strengthening uniformly across all regions.
The Real Constraint on Gold is the Fed: ETFs Take Their Cue from Interest Rates
The Federal Reserve is the most significant short-term variable for gold.
The latest FOMC statement, economic projections, and press conference were interpreted as hawkish, with no mention of downside risks to the labor market. Consequently, market pricing for future rate hikes increased, and the gold price declined.
The transmission mechanism here is direct: Gold pays no yield, so higher interest rates increase the opportunity cost of holding it; higher real yields make gold less attractive; a stronger U.S. dollar also pressures dollar-denominated gold.
Central bank gold buying is less sensitive to the interest rate path, but ETF flows are highly sensitive. A key point in the framework is that while official sector demand can persist, ETF buying is more readily influenced by the Fed, real yields, and the dollar.
The relationship shown in market charts is clear: The gold price has moved back in line with the U.S. 10-year TIPS real yield, with a high correlation; real yields remain above February levels; and during the Fed's pause, ETFs have been net sellers of gold.
Rate Hikes Don't Necessarily Crush Gold, But $5,200 Requires Two Conditions
A Fed rate hike does not automatically lead to a gold price decline.
Historical data shows mixed performance for gold following Fed hikes. On average, across a sample of 25 basis-point hikes, gold actually rose 0.84% one month later. This indicates the market is not simply trading on the "rate hike" event itself, but rather on the subsequent changes in the dollar, real yields, and risk sentiment.
The World Gold Council has listed several instances where gold rose after a hike: June 2006, when the Fed hiked amid growth concerns, supported by ETF and Chinese physical demand; March 2017, when the hike was interpreted as relatively dovish, leading to dollar weakness; December 2018, viewed as a policy error before the Fed pivoted to cuts in 2019; November 2022, occurring in a fragile market with a weakening dollar; and March 2023, when banking sector stress caused long-end yields to plunge, accelerating market bets on a pause and future easing.
This is also why upside risks for gold remain. The inflation path implied by the Fed's Summary of Economic Projections may not fully account for the disinflationary force from a potential market reopening and is above the estimates of some economists, whose baseline path still assumes the Fed remains on hold until 2026.
However, reaching $5,200 per ounce is no longer a problem that central bank buying alone can solve. Achieving that path requires at least two conditions: first, that lower oil prices genuinely translate into lower inflation and interest rate expectations; and second, that ETF outflows cease and reverse into net buying.
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