Despite all the uncertainty in the world — especially in geopolitics — gold, which is traditionally considered a safe-haven asset, has fallen by about 15% over the past three months.
Why? Have investors' risk-off preferences changed?
Not necessarily. The loss of shine in the precious metal largely reflects concerns that the Fed may not only delay interest rate cuts but could even be forced to raise rates again to bring inflation back toward its 2% target. The fact that the U.S. labor market remains remarkably strong, with nonfarm payrolls increasing by 172,000 in May, far exceeding expectations of 85,000, only reinforces this view.
Now, since gold does not generate income, higher real interest rates tend to make the metal less attractive relative to interest-bearing assets such as government bonds or high-yield savings accounts.
As for what happens if new Fed Chair Kevin Warsh strikes a dovish tone at the June 17 meeting despite the macro data suggesting otherwise, investors could start to question the Fed’s independence and lose some confidence in U.S. dollar–denominated assets, while gold, on the other hand, could benefit from that kind of scenario.
Let’s imagine that the conflict in the Middle East ends tomorrow and the biggest inflationary risk disappears overnight. Would that send gold prices back above $5,000?
A positive geopolitical breakthrough could certainly support gold, partly through a weaker U.S. dollar. However, simply reopening the Strait of Hormuz may not be enough to resolve the inflation problem.
First, clearing and securing shipping routes could take time. Second, many countries are currently relying on strategic petroleum reserves rather than purchasing oil at elevated market prices. Once conditions normalize, demand could return, potentially keeping energy prices higher for longer than many expect.
Another potential headwind for gold could come from liquidity flowing into major upcoming IPOs, including SpaceX (SPCX), OpenAI, and Anthropic. If easier inclusion in indexes such as the Nasdaq drives additional demand from large institutional investors and pension funds, equity markets could experience another rally. In that case, what’s the point of going into gold?
In conclusion, at first glance, the environment doesn’t look supportive for strong gold gains, beyond maybe an initial spike on positive news out of the Middle East. Still, things can easily take a different turn if the conflict ends, inflation slows faster than expected, and big IPOs disappoint.