(Kitco News) - Shifting interest rate expectations and demand for U.S. dollar liquidity are putting pressure on gold, but analysts are warning investors not to confuse a short-term pullback with the broader long-term trend.
The gold market is seeing its second week of losses as prices test support above $5,000 an ounce. Spot gold last traded at $5,044.80, down nearly 2.5% from last Friday. Silver is seeing similar price action as prices test support around $81 an ounce. Spot silver last traded at $81.04 an ounce, down 4% on the week.
The selling pressure in the precious metals has been extremely disappointing for some investors, as there were expectations that gold and silver would be higher due to safe-haven demand driven by geopolitical uncertainty and chaos in the Middle East.
“I’ve been long gold and I have not been having a great time these past two weeks,” said Christopher Vecchio, head of futures strategies and forex at Tastylive.com.
However, when looking at the broader financial market landscape, Vecchio said that gold’s selloff makes sense as the U.S.-Israel joint war against Iran has created a specific liquidity trade for U.S. dollars.
Although the gold market in general is extremely liquid, the physical market, during periods of economic stress, can quickly become illiquid. Vecchio said that in this environment, there is only one asset that people want.
“Right now, with all the uncertainty, investors need the liquidity of the world's reserve currency,” he said.
Vecchio said that the selloff in U.S. government bonds, as yields push back above 4%, is an indication that demand for safe-haven assets remains muted, but once the emergency need for liquidity abates, he would expect to see gold demand and prices take off again.
“The liquidity demand phase of the crisis is still unfolding, and that leaves me cautious on the metals at present,” he said. “ Timing when the liquidity crunch ends is difficult, so gold may not go up. Maybe it just stabilizes for a little while.”
Along with the latest geopolitical crisis, the U.S. dollar is also benefiting from shifting interest rate expectations ahead of the Federal Reserve's monetary policy meeting next week.
The war with Iran has created significant global supply chain issues, pushing energy prices in particular significantly higher. Rising prices for oil and other commodities are generating fears that inflation pressures in the U.S. will force the Federal Reserve to maintain its neutral monetary policy stance longer than expected.
In a note published Friday, economists at BMO Capital Markets said they expect the Federal Reserve to ease interest rates two times this year, with the first cut coming in September. Previously, the Canadian bank was looking for three rate cuts starting in June.
“The spike in oil prices owing to the Iranian conflict is stoking stagflation risk, at a time when job growth has already slowed to a crawl and inflation is still uncomfortably sticky,” the analysts said.
Julia Khandoshko, CEO at the European broker Mind Money, said in a comment to Kitco News that with inflation risks rising, the Fed has little reason to rush into easing.
“Geopolitics is often overstated in monetary debates, but oil is one single factor the Fed cannot possibly ignore. If crude sticks at $100 or above, U.S. gasoline prices will be really painful, feeding directly into the consumer basket. In that environment, discussing rate cuts will look all but irrelevant,” she said.
Lukman Otunuga, Senior Market Analyst at FXTM, said that gold’s test of support at $5,000 is not surprising ahead of the Federal Reserve’s monetary policy decision next week. He added that risks remain skewed to the downside.
“Indeed, traders are only pricing in an 80% chance of just one Fed cut in 2026 as oil prices linger near triple digits. Gold’s near-term may be influenced by the dollar’s performance, but the Fed decision next week may shape the precious metals medium- to longer-term outlook,” he said. “No changes are expected to US rates, but the Fed may be forced to reassess its policy strategy for 2026 amid surging energy prices. Should hawks dominate the scene, this could spell fresh pain for gold, which is down over 3% month-to-date. Looking at the charts, gold remains under pressure below $5100 with bearish targets at $5000 and $4900.”
Although downside risks to gold are growing, some analysts expect the precious metal to continue to attract renewed interest at lower levels.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that he still sees upside potential for gold.
“The war will add to inflation, but at the same time hurt economic growth,” he said. “While I believe it's wrong to rule out rate cuts in 2026, especially with an incoming Fed chief who listens to Trump, there is no doubt the Fed is in a bit of a pickle if economic data weakens and inflation rises. Cutting rates with rising inflation may send a shiver through the bond market with long yields rising, thereby causing an actual tightness through a steepening yield curve. That aside, central bank demand may slow, but overall fiscal debt concerns, geopolitical tensions, concerns about the value of money in general will, in my opinion, continue to underpin demand.”
Robert Minter, Director of ETF Strategy at abrdn, said that he also remains bullish on gold as he looks past the short-term selling pressure. He explained that gold remains in a long-term uptrend as governments continue to increase their deficit spending and central banks grow their balance sheets.
“There are no solutions currently being implemented, which can lower sovereign debt in most of the major fiat currency nations,” he said.
While most of the market’s attention will be on the Federal Reserve next week, the economic docket will be filled with other central bank meetings as well.
The week starts off with the Reserve Bank of Australia meeting, with markets expecting to see a modest rate hike as inflation pressures rise.
The Bank of Canada will announce its latest monetary policy decision on Wednesday morning ahead of the U.S. central bank. The Bank of Japan will be next on the list.
On Thursday, the Swiss National Bank, the Bank of England, and the European Central Bank will all release monetary policy decisions. Markets are not expecting to see any significant shift in monetary policy from these central banks either.
Markets will also receive more U.S. housing market data and regional manufacturing surveys.
Economic data to watch next week:
Monday: US Empire State Manufacturing Survey, RBA monetary policy decision
Tuesday: US Pending Home Sales
Wednesday: US PPI, BoC monetary policy decision, Federal Reserve monetary policy decision, BoJ monetary policy decision
Thursday: SNB monetary policy decision, BoE monetary policy decision, ECB monetary policy decision, US weekly jobless claims, US Philly Fed Survey, US New Home sales
