Gold can regain momentum as tightening fears fade

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The price of gold extended recent losses on Wednesday, amid conflicting signals over the potential for an imminent US-Iran agreement on ending the conflict. The precious metal is now down close to 15% since the US and Israel launched strikes on Iran at the end of February. While gold has historically benefited from a flight to safety during periods of elevated geopolitical risk, gold has come under pressure during this crisis due to worries that high energy prices will lead to tighter monetary policy from the Federal Reserve and other central banks, raising the opportunity cost of holding the precious metal. Investors have also favored money market instruments over gold as a source of liquidity in recent weeks.

Against this backdrop, we recently scaled back our year-end forecast for gold to USD 5,500 an ounce, from USD 5,900. But this still reflects our view that the precious metal will regain momentum after recent setbacks, climbing from its current level around USD 4,490 and topping its prior record high around USD 5,400 from earlier this year. In particular, we see support from:

Declining worries over Fed tightening should give way to the prospect of further cuts later in the year, in our view. Gold has been impacted recently by the rise in 2-year US Treasury yields, which are up close to 60 basis points since the start of the conflict, as investors have priced in the risk that US monetary policymakers will be forced to react to a renewed acceleration in inflation. Against this backdrop, the inverse relationship between US real yields and gold has reasserted itself over recent months. The correlation between 2-year US Treasury yields and gold now stands near -0.6, a notable reversal from the slightly positive relationship observed earlier in 2026. In our view, markets are focusing on opportunity costs, with gold’s non-yielding characteristics once again becoming a more important consideration as real rates remain elevated. That said, we believe that as evidence mounts later in the year that higher energy prices have not generated large second-round effects, the Fed will start to adopt a more dovish tone. Our base case is that the Fed will cut rates at its December policy meeting, followed by further easing in March 2027.

Central bank buying is likely to remain robust, more than offsetting the recent softening of demand from investors and jewelry consumers. Investor demand for gold exchange-traded funds (ETFs) and futures has softened, and the recent stabilization in flows is not yet sufficient to restore the strong upward momentum seen earlier in the year. Near-term physical demand may also face a headwind after India raised import duties on gold to 15% from 6%, while tighter financial conditions could continue to weigh on investor positioning. But these pressures look cyclical rather than structural. First-quarter investment demand remained robust at 536 metric tons, and central bank purchases surprised positively at 244 metric tons, highlighting that underlying demand has not disappeared. We expect central bank demand to remain robust in the 200-250 metric ton range in the second quarter, while jewelry demand is expected to stabilize around 300 metric tons, reinforcing our view that reserve diversification remains an important support for gold.

Gold's perceived value as a hedge against rising global debt burdens and continued demand for portfolio diversification. While we see government borrowing as sustainable, it is likely to remain a source of anxiety, adding to the appeal of certain real assets. With the general government deficit approaching 8% of GDP, the US debt trajectory is already steep. Our simulation suggests the net cost of debt could rise to nearly 19% of general government revenues by 2031, versus 14% in IMF projections (values for only the federal government are even higher). There is also a risk of a self-reinforcing dynamic in which higher debt costs increase issuance needs, pushing yields higher and further raising borrowing costs. Although our base case remains that yields will decline, we see investors’ concerns over debt levels as a risk that warrants close monitoring, with gold offering some protection.

So, we remain positive on the outlook for gold and continue to view the precious metal as a source of diversification within portfolios. Although near-term performance may remain sensitive to US-Iran headlines, energy prices, US yields, and the dollar, the medium-term case remains supported by central bank demand, reserve diversification, elevated global debt burdens, and the prospect of easier Fed policy later in the year. More broadly, commodities offer a valuable hedge against inflation and supply shocks, and their typically low correlation with equities and bonds makes them an effective portfolio diversifier, especially in periods of market stress.