Gold's appeal as a safe-haven asset has started to evolve amid geopolitical uncertainty, with analysts saying it changes investment strategies for the commodity.
Gold was at about $5,278 an ounce when the Iran war started on February 28 and remained largely steady in the first few weeks of the conflict. But from that point until Friday, when it gained 1.52 per cent to finish at $4,175.07, the precious metal has lost more than 20 per cent. After hitting record highs in January, gold this week posted its steepest monthly drop since 2008.
The precious metal typically tends to perform better during uncertainty combined with a weaker dollar, monetary easing or declining confidence in financial assets. It struggles when geopolitical concerns are outweighed by high interest rates and a strong greenback.
Noureldeen Al Hammoury, head of market insights and community engagement at the Dubai-based Equiti Group, which specialises in trading, told The National that gold "is not designed to rise during every war, political shock or market sell-off".
"In the short term, it competes with cash and government bonds, and it is highly sensitive to the US dollar and real interest rates," he added.
"If geopolitical tension causes inflation expectations and bond yields to rise, gold can fall because investors are offered a higher inflation-adjusted return on Treasury securities."
Gold remains a strategic hedge but "in the short term the opportunity cost of holding a non-yielding asset can dominate the geopolitical premium", Mr Al Hammoury said.
'Possible breakout'
Despite its decline, the World Gold Council, in its midyear outlook report released this week, said the commodity "nonetheless" ranks among the top performers over the past year, with other assets playing catch-up.
However, the report acknowledged that the first half of the year showed gold remains sensitive to heightened geopolitical concerns and abrupt shifts in investor sentiment.
Analysts at the London-based body said a "possible breakout" could tow gold back to $4,500. If current levels hold, they call for a range of plus or minus 5 per cent. JPMorgan on Friday said it projected the same level for the fourth quarter of 2026 and $4,300 in the third quarter.
"Clear catalysts – a worsening economy or renewed geopolitical shock, a shift towards lower interest-rate expectations, or a wave of dip buying – could reignite gold’s momentum," the council's report said. "Conversely, an environment of resilient growth, rising yields and calmer markets could see gold slip further – though a fall of more than 10 per cent to 15 per cent from current levels may be tempered by bargain-hunting demand."
The shifting environment has caused the definition of gold being a safe haven to evolve, making it more of a strategic reserve asset rather than a reactionary asset during crises, said Ashish Vijay, founder of Dubai-based Tiara Gems and Jewellery.
"Persistent central bank purchases, concerns over sovereign debt, inflation and currency diversification have created structural demand that supports gold even outside periods of acute geopolitical stress," he told The National.
Meanwhile, on a broader scale, market observers will keep an eye on the progress in peace talks between the US and Iran, with any breakthroughs likely to add more pressure on oil prices, which have already erased their premiums gained during the war. That could ease inflation concerns and benefit gold.
"Any hurdles in the process could push gold to the downside," said Eric Chia, a financial markets strategist at Singapore-based financial services firm Exness.
June's services purchasing manager's index and any further US Federal Reserve commentary could also "determine whether markets keep unwinding rate-hike bets or revert to the hawkish repricing that dragged gold to its recent low", he said.
However, less hawkish monetary policy expectations could continue to affect bond yields and support the metal, Mr Chia added.
East-bound pricing?
In another report last month, the gold council said central banks were expected to boost their stockpiles of gold over the next 12 months to help fight off economic and geopolitical shocks, despite the asset's declining price.
That highlights a correlation with interest rate decisions. Apex lenders are no longer influencing the metal through these alone and are rather becoming increasingly direct, strategic buyers of the asset, Mr Al Hammoury said.
That is especially important for central banks in emerging markets, which now view gold as a form of monetary insurance that carries no counterparty risk, cannot easily be frozen by another government and provides diversification away from dollar-denominated assets, he said.
"The important change is that central banks have become a structural source of demand rather than simply a background influence," Mr Al Hammoury added. "Their buying decisions can create a longer-term floor beneath gold, even when western investors are selling because interest rates are rising."
Analysts at Swiss lender Julius Baer expect gold to be further supported by central bank buying, which it sees as "the strongest structural force in the market".
Meanwhile, another factor influencing gold is demand shifting towards the East. While benchmark pricing remains centred on London and New York, the drivers of physical demand are increasingly concentrated in Asia – China and India, most notably – and the Middle East.
The People's Bank of China, in particular, increased its gold reserves for a 19th consecutive month in May, while Chinese net gold imports rose sharply during the first quarter of the year.
This creates an important distinction between demand in the West and the East. Western investors often treat gold as a tactical financial trade, while Asian households and central banks are more likely to view the metal as a long-term store of wealth and an instrument of reserve diversification, Mr Al Hammoury said. "That means western financial flows may still determine the short-term price, while eastern physical and official sector demand increasingly provides the long-term support."
Combined with growing investment infrastructure across the region, this shift is gradually reshaping the balance of influence in the global gold market, Mr Vijay said. "The East may not yet dictate the price, but it is increasingly influencing the market’s long-term direction."
