Gold Attempts to Recover, War Risk Looms
Gold prices held steady after posting their first weekly gain since the Middle East conflict broke out. Dip buyers took advantage of the price decline to enter, while the market awaited clarity on how long the war would last.
Bullion recovered its initial decline and held around US$4,500 per troy ounce. This resilience emerged despite continued oil price increases and a weaker stock market, indicating that some investors considered gold's decline over the past month attractive enough to accumulate.
However, the war also presents a downside for gold. Rising oil prices heighten inflation concerns, fading hopes for interest rate cuts. In a persistent inflation scenario, central banks risk maintaining tighter policies, and gold, as a non-yielding asset, could lose its appeal when interest rates are high.
The risk of conflict escalation further clouded sentiment. The entry of the Iran-backed Houthi group has added to concerns about a wider war, along with the deployment of additional US troops to the region. On the other hand, several countries such as Pakistan, Egypt, Saudi Arabia, and Turkey are trying to push for a peace process, but tensions remain high after Iran attacked aluminum smelters in Bahrain and the United Arab Emirates, and parts of Tehran experienced power outages following Israeli missile attacks.
The market is also weighing the possibility of additional pressure from central banks and liquidity conditions. Concerns that a prolonged conflict could prompt central banks to sell gold and raise interest rates to curb inflation, coupled with a broader "liquidity squeeze," are said to have dragged gold prices down by around 14% since the war began in late February.
However, expectations of an interest rate hike could be tempered by the risk of an economic slowdown. Several major investment managers believe the market has not fully priced in the potential for economic weakness, which could ultimately depress US Treasury yields. If yields fall, the opportunity cost of holding gold will also decrease, making gold more attractive again. On the other hand, there are signs of caution due to potential central bank selling, including the Turkish central bank's reported move to sell and exchange around 60 tons of gold in the first two weeks of the war. Many countries that accumulate significant amounts of gold are also energy importers, so a surge in oil prices could reduce the opportunity to buy gold.
Going forward, gold's direction will be heavily influenced by three factors: the duration and escalation of conflict (especially its impact on oil and inflation), changes in interest rate expectations, and flows from central banks and institutional investors. As long as war uncertainty persists, gold is likely to remain supported by hedging interests, but volatility is likely to remain high if the market reaffirms the narrative of prolonged high inflation and interest rates. (asd)
Source: Newsmaker.id
