As geopolitical tensions support gold prices, recent market behavior suggests that they are insufficient on their own to fuel a sustainable upward trend.
Experts believe that gold is likely to further decline as energy prices rise, thus fueling higher inflation over time.
Macro factors, including real yields, the US dollar, and interest rate expectations, remain the main constraints on further increase, according to ING Economics.
Higher energy prices, a strengthening dollar, and changes in interest rate expectations have reduced demand for safe-haven assets.
Gold prices on the COMEX fell by more than 8% on Monday to reach their lowest point since November 25th of last year. Prices hit a floor at $4,128.70 per ounce.
The contract had recovered some of the losses and was around $4,301 per ounce at the last quote.
Macro forces prevail:
Even with the escalation of the conflict in Iran, gold prices have decreased by 25% since their peak on January 29th.
This decline highlights the persistent dominance of macroeconomic factors, such as interest rates, the strength of the US dollar, and asset class positioning, on short-term price movements.
The pattern reflects past shock events, where the immediate need for liquidity often outweighs the demand for gold as a safe-haven asset in the initial phases, according to ING Economics.
“More broadly, geopolitics alone rarely sustainably drive gold prices; what matters is how these shocks impact inflation, monetary policy, and the dollar,” said Ewa Manthey, commodities strategist at ING Economics, in a report.
“In the short term, a stronger US dollar and the high liquidity of gold can make it a source of funding during episodes of tension.”
Energy Prices and Inflation:
High energy prices, fueled by worsening geopolitical tensions, pose a risk of enduring high inflation, complicating monetary easing prospects.
A prolonged period of high interest rates would maintain high real yields, creating a challenging environment for gold.
While the Federal Reserve kept rates steady this week, with Chairman Powell emphasizing the need for clearer evidence of inflation progress before any further easing, ING economist anticipates two 25-basis-point rate cuts later in the year, in September and December.
“However, a stagflationary environment – slower growth combined with persistent inflation – would remain supportive of gold in the long term,” added Manthey.
The US central bank recently highlighted rising inflation concerns and indicated that it would rule out further monetary stimulus if elements suggest that inflation is unlikely to reach its medium-term target.
<p"Therefore, the price of gold will likely continue to decline as energy prices rise further, threatening to push longer-term inflation expectations higher," said Thu Lan Nguyen, FX and commodities research head at Commerzbank AG.
Central Banks’ Purchases Slow:
The demand for gold continues to be supported by central banks, although the pace of purchases has slowed.
According to World Gold Council data, net purchases in January amounted to 5 tonnes, significantly lower than the 2025 monthly average of 27 tonnes, indicating a weaker start to the year.
Nevertheless, the composition of flows suggests sustained structural interest. Purchases by Uzbekistan, for example, exceeded sales by Russia.
In addition, the emergence of new buyers like Malaysia and the potential re-entry of the Bank of Korea hint at a gradual diversification of gold demand.
<p"That said, while official sector demand remains structurally supportive, reflecting an ongoing shift of reserves management away from the US dollar, it is unlikely to drive short-term price movements," said Manthey of ING.
Short-term price movements will likely be primarily determined by investment flows, although central banks may take advantage of lows to strategically bolster their reserves, she added.
The Middle East, a Gold Buyer:
An important factor is the Middle East, particularly Dubai, which is a key hub for gold trade.
“The war at its door is expected to have an impact on local gold demand,” said Carsten Fritsch, commodities analyst at Commerzbank.
Households in the Middle East acquired a substantial amount of 270 tonnes of gold last year, buying it in the form of jewelry, bars, and coins, according to World Gold Council data.
This quantity covered global demand, representing 10% of the total.
This figure exceeded observed demand in both the United States and Europe. A significant portion, over 70 tonnes, was attributable to Iran alone.
<p"This demand is now likely much lower due to the war," said Fritsch.
Continued Constructive Outlook:
“We remain overall constructive on gold, although short-term risks have increased,” said Manthey.
While the metal has been rising since the beginning of the year, the gold market remains susceptible to profit-taking episodes.
However, significant dips should attract buyers, particularly central banks and long-term investors.
<p"In the end, the direction of gold will depend less on geopolitical headlines alone and more on how these events influence inflation, monetary policy expectations, and real interest rates," added Manthey.
<p"For now, it is macroeconomic forces, not geopolitics alone, driving gold prices."
