Gold prices are behaving differently than anticipated. Experts explain the reasons behind this trend.

Main Insights

• Gold prices are currently facing downward pressure due to a stronger U.S. dollar and diminishing hopes for imminent interest rate reductions.

• Experts suggest that gold’s impressive gains over the last year may be a reason for its recent lackluster performance.

Traditionally, gold is viewed as a safeguard during times of geopolitical instability. However, this role has not held up recently.

Despite ongoing unrest in the Middle East, the price of spot gold dropped by about 1.6% on Thursday, settling near $5,060 per troy ounce. Investment vehicles tied to gold and mining stocks, such as the SPDR Gold Trust (GLD) and the VanEck Gold Miners ETF (GDX), are on track to post losses for the week. Silver has also seen declines.

Market analysts point to several factors explaining why gold, a classic safe haven, is underperforming expectations.

For one, investors have been driving up gold prices for the past year, treating it more as a momentum play. Additionally, ongoing attacks in Iran have led to higher oil prices, raising the risk of increased inflation—a scenario that could prompt the Federal Reserve to delay any rate cuts. At the same time, the U.S. dollar has strengthened, which typically puts downward pressure on gold.

Why This Is Important

Gold is often considered a reliable hedge during periods of uncertainty. Yet, amid heightened tensions in the Middle East, it has not provided the portfolio stability many anticipated.

Stephen Dover from Franklin Templeton Institute told CNBC that assets which have already experienced significant gains may not continue to rise as sharply, offering insight into why gold hasn’t acted as a haven during recent geopolitical events.

According to JPMorgan’s global markets strategy team, crowded trades have been unwinding, especially in silver. Meanwhile, the U.S. dollar has benefited from increased demand as a safe haven, with the U.S. Dollar Index rising about half a percent on Thursday.

Gold advocates remain optimistic about a rebound. The World Gold Council recently noted that the dollar’s recent strength, fueled by current conflicts, is likely temporary. If the dollar resumes its downward trend, it could provide support for gold prices.

At the same time, surging oil prices—driven by supply concerns linked to Middle East conflicts—have heightened inflation fears and reduced expectations for near-term interest rate cuts.

Additional Context

Goldman Sachs’ global economics team recently observed that while central banks typically do not react strongly to oil price shocks, they may tighten monetary policy if inflation is already high or if oil price increases are significant. Higher interest rates generally weigh on gold, as they make yield-generating assets like bonds more appealing.

Traders have pushed back their expectations for when the Federal Open Market Committee might lower its benchmark rate, now anticipating a possible cut later in the year. According to CME FedWatch, 43% of traders expect a target range of 3.25% to 3.5% for the mid-September meeting.