Gold prices have rebounded sharply since the lows around $4,100 recorded in the middle of the war in the Middle East, and are now approaching the key level of $4,800.
Once relied upon as a safe haven and inflation hedge, gold failed to display either of these attributes as the US and Israel attacked Iran. Instead, it traded more like a risk asset, tracking stocks and ignoring the looming inflation risk.
Indeed, gold rallied with stocks after the ceasefire was announced and is now heading towards the key $4,800 level.
“Gold is currently experiencing one of its most sensitive and critical phases from both an investment and economic perspective, as it approaches the psychological barrier of $4,800 per ounce,” explained Rania Gule, Senior Market Analyst at XS.com.
Gule continued to outline a shift in perceptions of gold amid market volatility and changes in the investment thesis behind precious metals across different stages of the market cycle.
“In my view, this rally is not merely a temporary reaction to passing geopolitical events; rather, it is the result of the convergence of several fundamental factors, foremost among them the weakness of the U.S. dollar, declining Treasury yields, and heightened concerns surrounding global inflation and tensions in the Middle East.
“This combination creates an ideal environment for the continuation of gold’s positive momentum in the short and medium term, especially if markets continue to price in higher economic risks during the second quarter of the year.
“In my opinion, the most influential factor behind the current movement is not geopolitical tension alone, but rather gold’s return to its classic correlation with macroeconomic variables, particularly real yields.
“When yields on U.S. 10-year Treasury bonds decline, the opportunity cost of holding gold decreases, enhancing its investment appeal.”