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Thought of the day

Gold has stayed below USD 5,200/oz for much of this month since the start of the US-Iran conflict, with its perceived “safe-haven” qualities yet to materialize in recent price action. This creates a contrast to its 65% rise last year, when heightened geopolitical risks served as a tailwind amid fundamental drivers such as lower real interest rates and debt concerns.

Its latest performance mirrors historical behavior during such events, where investors seek liquidity and consider alternatives like energy assets. For instance, gold jumped 15% after the start of the Russia-Ukraine conflict in 2022, but then declined by 15-18% as the Federal Reserve raised rates. The same happened during the Gulf War and Iraq War—prices rose 17% and 19%, respectively, at the start but decreased as tensions eased.

But we maintain the view that gold prices should rise toward USD 5,900-6,200/oz this year,

Gold is more of a hedge against the wider impact of conflicts, rather than direct wartime threats. Gold primarily insulates against monetary risks like currency devaluation, rising deficits, and economic slowdowns, which can result from geopolitical conflicts. In the short term , higher energy prices and inflation worries have led to a stronger US dollar and concerns over potential rate hikes—both are negative for gold prices. But we expect central banks to be watchful of inflation risks without making knee-jerk policy rate hikes. In addition, the longer the US-Iran conflict goes on, the higher the risk of negative economic impacts, which should support hedging demand for gold. Over the longer term, gold stands out as a hedge against inflation: According to the Global Investment Returns Yearbook, the real returns of gold and commodities since 1900 have positive correlations to inflation.

Underlying demand remains robust. While ETF investors trimmed their gold holdings slightly earlier this month, their positions have shown greater stability of late, and hedge funds have modestly boosted their net positioning in gold. We believe total gold demand is likely to stay strong, supported by continued central bank purchases, rising investment activity, as well as the structural growth of demand for gold jewelry amid higher incomes in Asia.

Structural trends should underpin gold’s appeal. We expect structural trends such as elevated government debt as well as central banks' and global investors’ efforts to diversify away from the greenback to support gold’s long-term outlook.

So, given the macroeconomic and political uncertainties beyond the risks arising from the US-Iran conflict, we continue to hold a positive view on gold and believe that the yellow metal remains an effective portfolio diversifier. Investors with an affinity for gold could consider an up to mid-single-digit allocation in a diversified portfolio.