Gold in a tug of war between short-term pressure and longer-term structural support

Risk on 

Gold closed at US$4,611/oz, flat for the month of April. Across most major currencies, gold lost a little ground on a weaker US dollar (Table 1). 

Our Gold Return Attribution Model (GRAM) suggests that a sizeable drop in market volatility – as risk appetite returned – was a major negative contributor. But this was countered by strong ETF inflows, a moderately weaker US dollar and other dip buying as a result of the sharp March sell-off (Chart 1). 

April saw strong inflows into global gold ETFs. Surprisingly, these were led by Europe, likely due to concerns from European investors that the region would be harder hit by the Strait of Hormuz closure. Asia and the US contributed about a third as much as Europe during the month. 

COMEX managed money net long positions saw a very modest increase in April to US$1bn (5t), but remain firmly in neutral territory.

The return of transitory 

Markets appear to be treating the Middle East crisis and Hormuz shutdown as transitory, a word that carries baggage after 2021-22. 

The shock has been large, but markets are not extrapolating it into a meaningful shift in inflation or growth…yet. 

US near-term inflation breakeven rates (two-year) spiked as the crisis intensified, but have since retraced much of that rise. US equities have rallied strongly on a return of risk appetite; options markets appear relaxed too. 

Last month, we highlighted several reasons why gold struggled as the crisis unfolded: prior strong performance, broad deleveraging, a rate shock and liquidity needs. 

The crisis remains unresolved, but markets – led by the US - have become sanguine. The US remains relatively sheltered from the energy shock and its consumers appear resilient enough for now. 

This presents a quandary for investors: a major geopolitical crisis is unfolding, but the triggers to tactically shift into gold seem absent. There is a tug-of-war between short-term pressure and longer-term structural support. 

Figure 1: Technically vulnerable but holding up

Near-term pressure 

Our take on the negative factors: 

• Gold is technically vulnerable, but the long-term uptrend is not yet broken. March’s decline held key support near the 200-day average and US$4,075/oz retracement level, but the rebound has stalled below the 55-day average. A renewed 200-day test looks likely; only a sustained break below US$4,075/oz would confirm a more serious technical top 
• US markets are treating the shock as containable. Equity and bond volatility premia have eased (Chart 2) – breakeven inflation rates have retraced; safe-haven appeal has diminished.
• The Fed backdrop has become less gold-friendly, with policy rate futures pricing higher-for-longer (Chart 3)
• US equities have a much larger expected earnings cushion with a big bounce in expectations for the year ahead1 
• Central bank demand remains structurally solid, but the crisis has reminded investors that gold can also be mobilised for liquidity in stress. Concerns about further official-sector sales or swaps could remain a headwind while the Hormuz disruption persists. 

Taken together, the near-term setup is not especially friendly. Gold is technically vulnerable, rate-cut expectations have moved out, and markets are treating the shock as temporary. Absent a fresh catalyst, this could remain a weak period for gold.

Chart 2: Markets feeling strangely calm

Equity and bond volatility risk premia*

Chart 3: Probability of a hike is non-zero

Fed funds futures curve, before and after M.E. crisis*

Calm before the storm

But the calm could prove fragile. If the shock is less temporary than markets assume, gold could regain support quickly, given that:

• On a global level, stagflation risks are edging up even if markets have faded the immediate inflation scare (Chart 4). Brent and WTI are pricing December contracts at a 22-25% premium compared to before the crisis (Chart 5)
• J.P Morgan estimates that the operational floor for global oil inventories could be reached by September, should the situation remain unresolved.² This could result in disorderly pricing of global oil and severe demand destruction
• Gold futures market positioning remains neutral, with room to rebuild
• A disorderly unwind of impactful leveraged Treasury basis trades could worsen a new deleveraging episode.

Chart 4: Data surprises wax stagflationary

Global economic and inflation surprises*

Chart 5: Oil markets are pricing in higher for longer

Brent crude futures curve before and after M.E. crisis*

And the more structural support factors should come back into play:

• Central bank buying continues, as per our most recent Gold Demand Trends report
• Rates are likely to fall eventually, even if cuts lag the growth slowdown
• Elevated debt levels and fiscal deficits remain unresolved
• Bonds are less reliable diversifiers when shocks are inflationary⁴
• Dollar diversification, while gradual, remains directionally supportive.⁵

In summary…

Markets appear to be treating the Middle East crisis as transitory, which is weighing on gold. Technical momentum looks more vulnerable, rate-cut expectations have moved out the curve and US-led risk appetite has recovered. But the crisis has also reinforced many of the structural reasons investors own gold in the first place: inflation uncertainty, geopolitical risk, unreliable bond diversification, fiscal pressure and gradual reserve diversification. A catalyst - exogenous or perhaps via a weaker price – will be needed to re-establish the structurally supported uptrend.