Gold fell again in May as Middle East crisis reshaped market focus

Key points:

• Gold fell for a third consecutive month in May, albeit at a much reduced pace as the Middle East conflict shifted investor attention towards its broader implications for global energy markets, inflation, the dollar and interest rates
• Gold tends to perform best during financial or economic shocks that weaken the dollar and lower real yields. The current energy-driven inflation shock has had the opposite effect, supporting yields and the dollar while reducing expectations for rate cuts, thereby creating a headwind for gold.
• Fiscal debt concerns, de-dollarisation, sticky inflation and not least central bank demand are expected to remain key pillars of support, the latter despite some temporary selling linked to energy-related pressures.

Since hitting a record peak near USD 5,600 in late January, gold has endured a challenging period, with prices falling for a third consecutive month in May, albeit by less than 2%, as the Middle East conflict shifted investor attention towards its broader implications for global energy markets, inflation, the dollar and interest rates. Despite the recent pullback, bullion remains up 5% so far in 2026, 36% over the past year and 91% over the last two years.

The prolonged disruption to shipping through the Strait of Hormuz has kept oil, gas, and refined fuel prices elevated, creating a market environment that has historically been less supportive for gold. Rather than triggering a classic flight to safety, higher energy prices have fuelled inflation concerns, pushed bond yields higher, strengthened the US dollar, and reduced expectations for additional Federal Reserve rate cuts. Together, these developments have created a significant headwind for a non-yielding asset such as gold.

The correction also coincided with a renewed surge in equity markets, particularly across AI-related sectors, reducing investor appetite for alternative assets. At the same time, several energy-importing nations faced rising financing pressures, prompting some central banks to liquidate portions of their gold reserves to support domestic currencies or help offset higher energy costs.

The recent setback once again highlights an important distinction often overlooked by investors. Gold is widely regarded as an inflation hedge, but the nature of the inflation shock matters.

Historically, gold performs best during periods of financial stress or economic weakness when inflation concerns are accompanied by falling real yields and a weakening dollar. The current situation is different. A supply-driven energy shock pushes inflation higher while simultaneously supporting yields and the dollar. This combination can temporarily undermine gold's appeal despite rising consumer prices.

Interest rate expectations remain a key focus among precious metal investors. As a non-interest-bearing asset, gold becomes more attractive when rates fall because the opportunity cost of holding it declines. Conversely, when markets push back expectations for rate cuts, gold often struggles.

This dynamic has been clearly visible over recent months as traders reduced expectations for monetary easing in response to elevated energy prices and persistent inflation risks. However, while interest rate expectations have weighed on sentiment, they are unlikely to remain the dominant driver indefinitely.

Once the geopolitical situation stabilises and the energy shock begins to fade, we expect investors to refocus on the structural themes that have underpinned the bull market in gold over recent years.

Central bank demand remains at the top of that list. While some countries have recently reduced holdings, these sales appear largely tactical rather than strategic. The broader trend of reserve diversification remains firmly intact, particularly among emerging-market central banks that continue to hold relatively small allocations to gold compared with developed economies.

Recent geopolitical developments have, if anything, reinforced the strategic case for gold ownership. Concerns about sanctions risk, reserve diversification, fiscal sustainability, and long-term currency debasement continue to encourage central banks to reduce reliance on traditional reserve assets. We therefore expect central banks to remain net buyers over the coming year.

Chinese demand also remains an important pillar of support. While investor participation has fluctuated alongside broader market sentiment, the longer-term desire among Chinese investors to diversify savings away from property and traditional financial assets continues to support bullion demand. China's central bank increased its gold reserves in April for the sixth consecutive month, likely helping drive a tripling of total gold imports via Hong Kong to 58.6 metric tons.

Meanwhile, fiscal debt concerns across major economies continue to support the investment case for hard assets. Government borrowing levels remain elevated, while the investment requirements associated with electrification, artificial intelligence, energy security, and climate adaptation are likely to keep upward pressure on commodity demand and long-term inflation expectations.

From a technical perspective, gold has so far found strong support near its 200-day moving average, currently located just above USD 4,400 per ounce. The market has tested this level twice during the recent correction and each time attracted renewed buying interest. While this does not eliminate the risk of further short-term weakness, it does suggest that long-term investors remain active beneath the market.

For now, many investors appear content to wait for greater clarity regarding the Middle East conflict before increasing exposure. However, once attention shifts away from the daily fluctuations in energy prices and geopolitical headlines, we believe the market will once again focus on the structural drivers that helped underpin prices in recent years. As a result, we maintain our constructive long-term outlook in the years ahead especially if the trends of reserve diversification, fiscal expansion, and de-dollarisation continue to gather momentum.