(Kitco News) - The renewed chaos in the Middle East has once again reignited inflation fears, pressuring gold as investors price in the prospect of higher interest rates. However, one precious metals analyst argues the market is approaching a tipping point where investors begin worrying less about inflation and more about the stability of the global economy—a shift that could reignite safe-haven demand for bullion.
In an interview with Kitco News, Kirill Kirilenko, Lead Precious Metals Analyst at CRU, said the gold market remains caught in a familiar tug of war: Higher oil prices lift inflation expectations, pushing bond yields higher and encouraging markets to anticipate tighter monetary policy, limiting gold's upside.
"At the moment everything goes through this transmission channel," he said. "Oil prices rise, inflation expectations rise and, as a result, interest-rate expectations also rise, which are pressuring gold prices lower or keeping them around the $4,000 level."
That outlook is reflected in CRU's latest Mid-Year Commodity Outlook, which notes that the renewed conflict has complicated the Federal Reserve's easing cycle by lifting inflation expectations, pushing sovereign yields higher and reducing the scope for near-term rate cuts. At the same time, investors have favored cash over traditional safe havens, temporarily capping gold's upside even as geopolitical tensions remain elevated.
However, Kirilenko said that relationship may not persist if the conflict continues to spread.
Rather than viewing higher oil prices simply as an inflation problem, investors could begin asking broader questions about global trade, financial stability and geopolitical security.
"If it's going to broaden out, then investors will start asking different questions—not how high inflation will go because of rising oil prices, but what the global security regime is going to look like," he said. "They will become more concerned about the stability of the global political and financial system."
Kirilenko pointed out that this shift in sentiment would move markets closer to the threshold where safe-haven demand begins to dominate interest rate expectations.
Gold remains a strategic monetary asset
Despite gold's inability to fully capitalize on geopolitical turmoil, Kirilenko said the metal has actually fulfilled its traditional role as portfolio insurance.
He noted that some investors have questioned why gold failed to rally more aggressively during the Iran conflict. However, he argued that gold's strong gains over the previous year made it one of the few liquid assets investors could sell to raise cash during periods of market stress.
"It actually did play its role spectacularly well because it acted as an insurance," he said, adding that gold had become "a hostage of its own success" because of its strong rally into the beginning of the year.
Looking beyond short-term volatility, Kirilenko expects both central banks and retail investors to continue increasing their exposure to gold as geopolitical uncertainty persists.
"I think gold will continue to be on the radar of central banks, and probably more retail investors will want to have a piece of the yellow metal to secure themselves against shocks and volatility in the current world," he said.
CRU's report also argues that while official-sector purchases may moderate somewhat this year, central banks should continue providing an important structural floor beneath the market as reserve diversification and geopolitical fragmentation remain long-term drivers of demand.
Limited room for higher rates
Kirilenko also pushed back against expectations that the Federal Reserve will embark on an aggressive tightening cycle despite elevated inflation.
He said CRU's economists currently expect just one rate increase in December before policymakers eventually shift back toward easing.
More importantly, he argued that today's debt burdens severely limit how far interest rates can rise.
"I don't think interest rates can rise much higher from current levels," he said, noting that annual U.S. debt-servicing costs have already climbed above $1 trillion, exceeding the country's military budget.
"I don't think the Federal Reserve would want to make debt servicing even more expensive."
That view stands in contrast to broader market concerns that persistent inflation will force policymakers into a prolonged tightening cycle.
Kirilenko said the longer-term outlook becomes even more constructive for gold because virtually every plausible economic outcome eventually leads to lower interest rates.
If artificial intelligence significantly boosts productivity, stronger economic growth would allow the Federal Reserve to normalize rates lower. If AI fails to deliver meaningful gains and economic growth weakens, policymakers would also be forced to cut rates to support the economy.
Even a middle-ground scenario would likely produce enough productivity gains to allow rates to gradually drift lower.
"In all three scenarios, the Federal Reserve can cut rates to their minimum levels," he said. "Which in all three scenarios is very good for gold."
For Kirilenko, that means gold's long-term investment thesis extends well beyond short-term geopolitical headlines.
With sovereign debt continuing to rise across the world's major economies and investors increasingly viewing bullion as a monetary asset rather than simply an inflation hedge, he expects the strategic case for gold to remain firmly intact even if near-term volatility persists.
