As geopolitical tensions support gold prices, recent market behavior suggests that they are insufficient on their own to fuel a sustained bullish trend.
Experts believe that gold is likely to fall further as energy prices rise, thus fueling higher inflation over time.
Macro factors, including real yields, the US dollar, and interest rate expectations, remain the main constraints on further increase, according to ING Economics.
Higher energy prices, a strengthening dollar, and changes in interest rate expectations have reduced demand for safe-haven assets.
Gold prices on the COMEX fell by more than 8% on Monday to reach their lowest since November 25 last year. Prices hit a low of $4,128.70 per ounce.
The contract had recovered some of the losses and was trading around $4,301 per ounce at the last close.
Macroeconomic forces prevail
Even with the escalation of the conflict in Iran, gold prices have fallen by 25% since their peak on January 29.
This decline underscores the persistent dominance of macroeconomic factors, such as interest rates, the strength of the US dollar, and asset class positioning, on short-term price movements.
The pattern reflects past shock events, where the immediate need for liquidity often outweighs the demand for gold as a safe haven in the initial phases, according to ING Economics.
“More broadly, geopolitics alone rarely sustainably drive gold prices; what matters is how these shocks impact inflation, monetary policy, and the dollar,” said Ewa Manthey, commodity strategist at ING Economics, in a report.
“In the short term, a stronger US dollar and ample gold liquidity can make it a source of funding during periods of tension.”
Energy prices and inflation
Higher energy prices, fueled by worsening geopolitical tensions, pose a risk of sustained high inflation, complicating monetary easing prospects.
An extended period of high-interest rates would maintain elevated real yields, creating a challenging environment for gold.
While the Federal Reserve kept rates steady this week, with Chairman Powell emphasizing the need for clearer evidence of inflation progress before any further easing, ING economists anticipate two 25 basis point rate cuts later in the year, in September and December.
“However, a stagflationary environment – slower growth combined with persistent inflation – would remain favorable for gold in the long term,” added Manthey.
The Federal Reserve has recently highlighted rising inflation concerns and indicated that it would rule out any additional monetary stimulus if elements suggest that inflation is unlikely to reach its medium-term target.
“Gold prices will likely continue to decline as energy prices rise further, threatening to push longer-term inflation expectations higher,” said Thu Lan Nguyen, FX and commodities research head at Commerzbank AG.
Central bank purchases slow down
Gold demand continues to be supported by central banks, although the pace of purchases has slowed down.
According to World Gold Council data, net purchases in January amounted to 5 tonnes, significantly lower than the 2025 monthly average of 27 tonnes, indicating a weaker start to the year.
Despite this, the composition of flows suggests sustained structural interest. Purchases from Uzbekistan, for example, exceeded sales from Russia.
Additionally, the emergence of new buyers such as Malaysia and the possible return of the Bank of Korea hint at a gradual diversification of the gold demand base.
“However, while official sector demand remains structurally supportive, reflecting a continued shift in reserve management away from the US dollar, it is unlikely to drive short-term price moves,” said Manthey from ING.
Short-term price movements will likely be primarily determined by investment flows, although central banks may take advantage of dips to strategically bolster their reserves, she added.
The Middle East, a key gold buyer
An important factor is the Middle East, particularly Dubai, which is a key hub for gold trading.
“The war at its doorstep is expected to impact local gold demand,” said Carsten Fritsch, commodities analyst at Commerzbank.
Private households in the Middle East acquired a substantial 270 tonnes of gold last year, buying it in the form of jewelry, bars, and coins, according to World Gold Council data.
This quantity covered global demand, accounting for 10% of the total.
This figure surpassed observed demand in both the United States and Europe. A significant portion, over 70 tonnes, was attributable solely to Iran.
“This demand is likely much lower now due to the war,” said Fritsch.
Continued constructive outlook
“We remain overall constructive on gold, although short-term risks have increased,” said Manthey.
While the metal has risen since the beginning of the year, the gold market remains susceptible to profit-taking episodes.
However, significant dips are likely to attract buyers, especially central banks and long-term investors.
“Ultimately, the direction of gold will depend less on geopolitical headlines alone and more on how these events influence inflation, monetary policy expectations, and real interest rates,” added Manthey.
“For now, it is macroeconomic forces, not geopolitics alone, that are driving gold prices.”
