Gold continues to trade within a broad range of $3,950 to $4,200 per ounce as investors assess the inflationary impact of higher energy prices against the longer-term risks to global economic growth.
Lower-than-expected US inflation briefly pushed gold above $4,100. However, another increase in crude oil prices and renewed tensions in the Middle East quickly shifted investors’ attention back to inflation and the future direction of Federal Reserve policy.
The recent wave of investor selling appears to have largely run its course. Holdings in gold-backed exchange-traded funds have stabilised, while continued purchases by central banks remain an important source of support for the market.
Silver and platinum, meanwhile, continue to struggle to convince investors. Uncertainty surrounding economic growth and interest rates is clouding the outlook for the entire precious metals sector.
Gold is still searching for direction
According to Ole Hansen, Head of Commodity Strategy at Saxo Bank, gold is still looking for a clear direction following the deep correction that began in January.
Recent price movements show that the market is attempting to identify the dominant macroeconomic theme for the second half of the year: persistent inflation or an economic slowdown accompanied by growing concerns over public debt and currency depreciation.
Gold gained almost $100 after the publication of a lower-than-expected US Consumer Price Index reading, briefly returning above $4,100 per ounce. Investors responded by reducing expectations that the Federal Reserve would rapidly tighten monetary policy.
That momentum soon faded. A renewed increase in crude oil prices, combined with further US attacks on Iran, revived concerns that higher energy costs could once again feed into inflation and increase the risk of tighter monetary policy.
Gold subsequently fell back towards $4,000, remaining within the broad consolidation range that has contained prices over the past several weeks.
Higher oil prices create conflicting signals
The lack of a clear trend reflects the opposing forces currently influencing the precious metals market.
Traditionally, higher oil prices are negative for gold. They increase inflation expectations, support US Treasury yields and strengthen the dollar. This raises the opportunity cost of holding non-yielding assets such as gold.
This relationship was also visible at the beginning of the week, when the yield on two-year US Treasury bonds reached its highest level in more than a year.
However, recent price action suggests that investors may be beginning to look beyond the immediate inflationary consequences of higher energy costs.
Although Brent crude rose above $85 per barrel, while diesel, petrol and jet fuel prices reached levels equivalent to approximately $160 per barrel, gold has so far avoided a deeper sell-off.
It is still too early to conclude that the traditional inverse relationship between oil and gold has permanently changed. Nevertheless, gold’s ability to remain close to $4,000 suggests that investors are becoming less inclined to sell aggressively whenever a new wave of inflation concerns emerges.
Energy shock may eventually weaken economic growth
One explanation may be the difference between the short-term and long-term consequences of an energy price shock.
Higher fuel prices initially increase inflation and strengthen expectations of higher interest rates. If elevated energy costs persist, however, they may also restrict economic growth by reducing consumers’ purchasing power, squeezing corporate profit margins and weakening investment.
Should concerns over economic growth begin to outweigh inflation risks, gold’s defensive qualities could once again become the main factor supporting its price.
Federal Reserve Chair Kevin Warsh’s appearance before Congress did little to resolve the uncertainty. He confirmed the Fed’s determination to restore price stability but provided no clear indication of when the next change in monetary policy might occur.
As a result, precious metals remain highly sensitive both to incoming inflation data and to developments in global energy markets.
Silver and platinum remain under pressure
Silver and platinum are showing even less convincing price action than gold.
Following sharp corrections from this year’s highs, gold is down 7.2% since the beginning of the year. Nevertheless, it remains approximately 20% above its level from a year ago.
Silver has fallen by 17% year to date, although it is still up 52% on an annual basis. Platinum has experienced the deepest correction, losing 20% since the start of the year, while remaining 15% more expensive than it was 12 months ago.
These differences highlight gold’s stronger defensive characteristics.
Silver and platinum remain caught between support from safe-haven demand and fears that persistently high energy prices and restrictive monetary policy may eventually weaken industrial demand.
Until the macroeconomic outlook becomes clearer, all three metals are likely to remain in a consolidation phase. Gold, however, should continue to outperform the metals that are more sensitive to the economic cycle.
ETF holdings stabilise as central banks continue buying
Investor positioning data present a similar picture.
Gold ETF holdings have broadly stabilised following last month’s sell-off. This suggests that the period of aggressive liquidation has largely ended, although it has not yet been replaced by a renewed increase in investor demand.
Continued purchases by central banks remain an important structural source of demand. This supports the view that gold is currently consolidating rather than entering the early stages of a new downward trend.
The base-case scenario remains that gold will continue to trade within a broad range of $3,950 to $4,200 per ounce.
A sustained move above $4,200 could indicate that investors are beginning to focus more on the economic consequences of a prolonged energy shock than on inflation itself.
Conversely, a fall below $3,950 would suggest that concerns about inflation, higher bond yields and a stronger US dollar have regained control of the market narrative.
“The gold market has reached a point where short-term expectations concerning Federal Reserve policy are beginning to compete with longer-term concerns about the condition of the global economy and the stability of public finances. In such an environment, it is becoming increasingly difficult to build investment strategies around a single dominant macroeconomic scenario,” said Aleksander Mrózek, Key Client Relationship Manager for the CEE region at Saxo Bank.
“This is precisely why a well-diversified portfolio is becoming increasingly important. It provides greater flexibility when markets begin to change their narratives rapidly, rather than merely adjusting asset valuations,” he added.
