Gold’s Outlook No Longer Straightforward

Commodities | 11:09 AM

Oil-driven inflation, geopolitical uncertainty, central bank buying and selling and logistical issues in the Middle East will all influence the price of gold in 2026.

• The price of Gold has pulled back from record highs due to war in Iran
• Oil price spike suggests higher rate hike risk
• Central banks are selling as well as buying
• UBS adds five new gold juniors to its coverage

By Greg Peel

The price of gold is down -5% since February 27, when Israel and the US launched attacks on Iran, as a strong year-to-date performance, a strengthening US dollar and its highly liquid characteristics have outweighed geopolitical risk-related inflows.

This is not unusual and Morgan Stanley notes similar pullbacks resulting from covid, the start of the Russia-Ukraine conflict, and Trump’s Liberation Day.

Investors have liquidated gold holdings for several reasons in recent months. Prices surged by more than 20% in less than 30 days earlier this year, pushing volatility above 30%, ANZ Bank analysts note, to the highest level since the pandemic.

This sharp rally prompted tactical profit-taking, resulting in more than -150t of gold being sold through February.

Rising prices also triggered multiple increases in margin requirements for gold and silver futures trading across major markets, including Comex and the Shanghai Futures Exchange (SHFE), reducing leverage and weighing on sentiment.

Broad equity sell-offs typically trigger liquidation of gold assets, as was the case in the GFC, covid, the beginning of the war in Europe and now similarly the war in the Middle East.

While it seems counterintuitive that gold should fall when geopolitical risk is heightened, it is simply a matter of leveraged equity investors needing to quickly raise cash to cover margin calls. Once this wash-out runs its course, gold typically re-establishes its status as a hedge against uncertainty.

Morgan Stanley had been highlighting a second half 2026 bull case for gold of US$5700/oz, driven by expectations of continued central bank buying, Fed rate cuts supporting exchange-traded fund (ETF) inflows, and a shift in investor interest in real assets.

But recent events now result in two-way risks.

While geopolitical risk can be supportive for gold, its performance in the second half of 2022, after Russia had invaded Ukraine at a time the covid supply shock was still prevalent, shows us this is not always the case, especially if it drives inflation and Fed rate hikes, Morgan Stanley points out.

Morgan Stanley still sees two cuts this year, assuming the Fed is able to look through inflation. The analysts also note differences to 2022, when post-covid recovery also contributed to rate hikes.

However, if the Fed does end up on hold for longer or even hiking, history suggests ETFs, which are often the swing gold buyer/seller, could liquidate some of their gold holdings.

Morgan Stanley’s forex strategists also see two-way risks for the US dollar, which creates an uncertain outlook for gold. There is also a risk of a stagflation scenario, which is usually positive for gold relative to other assets.

Morgan Stanley continues to highlight its bull case for gold with Fed rate cuts still expected by its economists for June and September.

However, the analysts acknowledge recent events and their potential consequences for macro assets bring more focus on downside risks too, and thus they would rather wait to see how long the conflict lasts to take a stronger directional view.

Gold versus Oil

The US dollar gold price falls if the US dollar rises, and the US dollar has recently strengthened due to its safe haven status, particularly as rising oil prices benefit the US which is a net energy exporter, ANZ analysts note.

In contrast, currencies such as the euro, yen and Swiss franc have weakened, as higher oil prices negatively affect those countries’ trade balances.

Despite the risk of short covering in the US dollar, ANZ views the rebound as temporary, given the US dollar remains overvalued in the analysts’ view. A return to US dollar weakness is therefore likely to drive renewed investment flows into gold.

While concerns are mounting over the Fed’s approach to rate cuts, with higher oil prices raising the possibility of renewed inflation pressures, ANZ sees these pressures as temporary and does not expect the Fed to reverse its monetary policy stance, as the disinflationary trend remains intact.

ANZ’s base case remains for three Fed rate cuts commencing in June, with policy rates declining to 3% by the end of December. Lower interest rates should continue to support investment flows into gold.