This year, the silver chart is starting to resemble that of a cryptocurrency. Gold has been more stable, but even there, volatility has been unusually high for something that is supposed to behave like a safe-haven asset.
Have precious metals become the new playground for speculators, just as GameStop was in its day?
Several factors came together at once. First, there was a heavy dose of leveraged speculation in the market. Then, news about the possible nomination of Kevin Warsh as the next Fed Chair added fuel to the fire, given his more aggressive stance on shrinking the Fed’s balance sheet. And finally, CME Group’s decision to tighten margin requirements for gold and silver futures also played a role.
Later on, another geopolitical shock in the Middle East shifted investor attention away from gold and toward energy and fertilizers. The inflation worries tied to a possible closure of the Strait of Hormuz also didn’t help sentiment.
Even if the Fed doesn’t hike further, it may still delay rate cuts, and that matters for XAUUSD since it doesn’t pay any yield. In a higher-for-longer rate environment, it becomes less attractive.
On top of that, there’s been some central bank selling in the background, with Turkey being one example, which just adds a bit more pressure.
Now that we’ve looked at the past, what about the outlook?
The broader uptrend in gold actually hasn’t broken. What we’ve seen so far looks more like a correction after a strong run last year and earlier this year.
But for the rally to really resume, tensions in the Middle East would need to cool down. If the situation stabilizes and the Strait of Hormuz fully reopens, one major source of inflation risk would fade, reducing the pressure on central banks to turn more hawkish. The issue is that both sides still hold very different negotiating positions, so reaching an agreement won’t be easy. And there’s still the risk of further escalation, including disruptions to the Bab el-Mandeb Strait or even some form of ground operation.
On the other hand, the longer the conflict goes on, the more traditional U.S. partners in the region may gradually shift toward trading in yuan and holding more gold instead of Treasuries. Some even suggest that this trend has already begun.
To sum it up, gold still has upside potential, but how soon that happens depends on geopolitics cooling down.