Spot gold fell again by 1.14% last Friday, marking its second consecutive weekly decline, with a cumulative weekly drop of nearly 2.9%. This correction arrived swiftly and decisively. During early Asian trading on Monday, the price briefly fell below the key $5,000 psychological level, hitting a near one-month low of $4,967.44 per ounce. While markets had high hopes for gold to shine amid geopolitical conflict, its performance has been overshadowed by a strong US dollar and inflationary concerns stemming from the Middle East tensions. Independent precious metals trader Tai Wong noted that although long-term asset allocation logic still supports a bullish outlook for gold, the US dollar has climbed to a near four-month high since the Iran conflict erupted, pushing gold prices to persistently test lower levels. This dual pressure from a strong dollar and ongoing war has placed gold in an unusually challenging short-term position.
The US dollar index surged powerfully past the 100 mark, making gold instantly more expensive for investors holding other currencies. On Friday, the dollar index rose 0.75%, breaking through the 100 barrier to close around 100.54, its highest level in ten months. For the week, it gained 1.67%, the largest weekly increase in nearly a year and a half. For investors using euros, yen, or other currencies, dollar-denominated gold became significantly more expensive, dampening buying interest considerably. Commerzbank stated in a recent report that market expectations for tighter monetary policy are the core reason for gold's pressure. Rising interest rates substantially increase the opportunity cost of holding physical gold, which yields no interest and incurs storage fees, causing its safe-haven appeal to dim in a high-rate environment. Simultaneously, robust US economic data reinforced the dollar's strength. January consumer spending rose 0.4% month-on-month, slightly exceeding expectations, while the core PCE price index increased 0.4% monthly, with the annual rate hitting its highest level since March 2024. These figures, combined with Middle East tensions, have led economists to believe the Federal Reserve is unlikely to restart interest rate cuts for a considerable time. Barclays even pushed back its forecast for the Fed's first rate cut this year from June to September, reducing the expected total cuts for the year to just one 25-basis-point reduction. Traders' expectations for the total rate cuts by the end of 2026 have plummeted from over 50 basis points before the conflict to just 22 basis points. This significant revision in expectations has directly undermined a key pillar of support for gold as a beneficiary of rate cuts.
The escalation of conflict in the Middle East has created a dilemma for gold's traditional role as a safe-haven asset. Following the announcement of a 30-day partial waiver for sanctioned Russian oil, the US administration stated that "very severe strikes" on Iran would occur within the "next week." The ongoing conflict, now in its third week, has resulted in over 2,000 casualties and brought shipping through the Strait of Hormuz—a conduit for one-fifth of global oil shipments—to a near standstill, causing one of the largest oil supply disruptions in history. Brent crude futures have surged nearly 40% since the conflict began. Although prices retreated slightly on Friday, they were still on track for a weekly gain. Soaring oil prices have directly boosted global inflation expectations. A macro strategist at Wells Fargo noted that short-term US dollar rates may continue to fluctuate with energy prices, and if the conflict persists, market focus could shift from inflation to growth concerns. Matt Bush, an economist at Guggenheim Investments, cautioned that while energy prices would need to rise significantly for several months to materially impact core inflation, the already fragile labor market means an oil price shock could simultaneously hamper economic growth. This challenges the Fed's dual mandate of controlling inflation and maintaining employment, prompting increased caution among policymakers. Interestingly, although gold is traditionally a preferred hedge against inflation and uncertainty, fears of "stagflation" triggered by high oil prices are currently weighing on its price. Investors are favoring higher-yielding US dollar assets over non-interest-bearing gold. Some analysts even warn that if oil prices continue to reach new highs, gold could retreat further, potentially towards $4,200.
Volatility in bond yields also reflects market caution. US Treasury yields were mixed on Friday: the two-year yield fell 3 basis points to 3.732%, while the 10-year yield edged higher to 4.283%, after touching a one-and-a-half-month high intraday. While the PCE data slightly eased some concerns, inflation anxiety driven by oil prices remains the dominant market theme. Traders will closely watch Federal Reserve Chair Jerome Powell's remarks following the Wednesday meeting and the updated interest rate projections. Wells Fargo suggests the bar for the Fed to appear more "hawkish" than market expectations is relatively low, implying the path to rate cuts could be extended further. Meanwhile, the European Central Bank will also hold a meeting on Thursday. Soaring oil prices might prompt consideration of rate hikes, but economists remain cautious about tightening policy in energy-import-dependent economies, as high energy costs are already dampening growth in the Eurozone and Japan, putting pressure on energy-sensitive currencies like the euro and yen.
In this complex environment, market opinions are divided. Daniel Pavilonis, senior commodity broker at RJO Futures, believes gold and silver will continue to follow stock market trends in the short term, which have an inverse relationship with Treasury yields. As long as energy prices push yields higher, metals will face pressure. He emphasized that developments in the Middle East—such as whether more naval escorts are deployed or if Indian tankers can continue transiting the Strait of Hormuz—will be critical turning points. Last week's Kitco News Gold Survey showed 40% of Wall Street analysts were bullish, 40% bearish, and 20% neutral for the week ahead. Retail investors were more optimistic, with 63% anticipating price gains. Independent trader Tai Wong also stressed that despite short-term pressure from the dollar and war, the long-term asset allocation rationale remains firmly bullish. The partial resumption of gold outflows from Dubai also suggests physical demand has not completely dried up.
On the geopolitical front, statements from the US administration add further uncertainty. Threats of more strikes on Iran's key oil export terminal at Kharg Island were accompanied by calls for a "Strait of Hormuz护航联盟" involving major Asian nations, France, Japan, South Korea, and the UK, with a pledge of "significant US assistance." Iran has vowed retaliation, announcing "precise and devastating" strikes on four US military bases. Both sides have rejected ceasefire efforts mediated by Middle Eastern allies, with Omani and Egyptian mediation currently stalled. With no signs of the war ending, reports suggest the US government is preparing to formally announce the护航联盟, indicating the energy crisis could persist. However, the temporary waiver on Russian oil and Iran's allowance for the passage of an Indian tanker through the strait hint at potential motives for both sides to return to negotiations. Forex strategist Karl Schamotta warned of two-way risks in currency markets—a "decent agreement" by the weekend could trigger a rapid rebound in risk assets.
In summary, the recent pullback in gold prices results from a combination of a strong US dollar, rising inflation expectations, and delayed Fed rate cut projections. In the short term, as long as oil prices remain high and yields maintain upward pressure, gold will continue to face tests and may probe lower support levels. However, from a medium to long-term perspective, the persistent uncertainty from the Iran conflict, risks of global supply chain disruptions, and gold's traditional status as an ultimate safe-haven asset provide a solid foundation for a rebound. Any signal of a potential shift in Fed policy or a substantive de-escalation in the Middle East could trigger a sharp corrective rally in gold prices.
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