Head of Commodity Strategy
Gold trades higher, extending a rebound that has seen bullion decouple from the recent market narrative where rising oil prices translated almost mechanically into lower precious metal prices. In recent weeks, higher crude prices, driven by the war in the Middle East and the closure of the Strait of Hormuz, reinforced inflation concerns, lifted bond yields, supported the dollar and in the process reduced the appeal of non-yielding assets such as gold. That relationship is now showing some signs of breaking down.
The latest escalation in the geopolitical outlook has prompted a shift in market thinking. Crude oil surged to a fresh wartime high in Asian trading, with the expiring June Brent contract briefly trading near USD 125 per barrel, while the new front-month July contract rose above USD 113. With the Strait still closed and physical energy markets tightening further, the immediate risk remains skewed towards even higher prices until shipping flows are restored and regional supply chains begin normalising.
However, while oil’s inflationary impact remains substantial, the market is increasingly recognising that this is no longer just an inflation story. Reports that President Trump is considering fresh military options in Iran have sharpened concerns that the conflict may broaden rather than move towards resolution. That raises the risk of prolonged regional instability, deeper supply disruptions, renewed pressure on already depleted strategic reserves, and mounting risks to global growth. In that environment, gold’s role as a hedge against geopolitical and financial uncertainty once again comes into sharper focus.
This shift is important because it changes how markets interpret rising oil prices. Moderate increases in crude prices tend to hurt gold by lifting inflation expectations and pushing central banks towards tighter policy for longer. But sharp and prolonged increases, especially when caused by war-related supply disruptions, begin to carry a more stagflationary message. They squeeze household purchasing power, pressure corporate margins, undermine confidence and increase recession risks. At that point, gold increasingly behaves less like an inflation victim and more like a hedge against broader economic and market instability.
The latest Federal Reserve meeting added another layer of complexity. Rates were left unchanged, but several policymakers reportedly signalled a desire to remove the easing bias as the Iran war continues to cloud the inflation outlook. Under normal circumstances, that combination of firmer yields and a stronger dollar would be expected to weigh on bullion. Instead, gold has attracted fresh demand despite both headwinds, a sign that investors are increasingly willing to prioritise portfolio protection over short-term macro carry considerations.
This development also suggests the market may be reassessing the durability of the recent correction. Gold’s sell-off from its April peak was driven by profit taking, reduced safe-haven demand following temporary hopes for de-escalation, and a sharp repricing of interest rate expectations as energy prices surged. But the structural drivers that supported gold’s rally over the past two years have not disappeared. Elevated fiscal deficits, continued central bank reserve diversification away from the dollar, rising geopolitical fragmentation and concerns about long-term currency debasement remain firmly in place.
From a technical perspective, the recent recovery has improved the short-term outlook. Gold found demand ahead of USD 4,500, a level that roughly marks the 50% Fibonacci retracement of the March to April rebound. That defence of support has stabilised sentiment following the recent correction. The next important test is USD 4,660. A sustained break above that level would improve momentum signals and may force tactical short sellers to cover, potentially accelerating upside momentum.
For now, gold remains caught between two powerful forces: higher yields and a stronger dollar on one side, and rising geopolitical and systemic risk on the other. At this stage, the latter is once again gaining the upper hand.
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