Gold Faces Headwinds as Oil-Driven Inflation Keeps Real Rates High
Bart Melek, the Head of Commodity Strategy at TD Securities, highlights the pressures facing gold in the marketplace. He indicates that the ongoing high inflation driven by oil prices is maintaining elevated real interest rates, which raises the opportunity cost of holding gold. Demand from institutional investors, ETFs, and central banks has weakened, with key technical support observed near the 200-day moving average around $4,258. However, he projects a potential recovery towards the $5,200 mark as the oil market stabilises.
Real Rates Limit Gold’s Potential
Unlike many commodities, gold is considered a monetary asset and has typically performed well amid rising inflation. This is contingent, however, on monetary policy not vigorously suppressing inflation through significant hikes in real rates—similar to the period from 1979 to 1982.
The present situation, marked by a negative supply shock, suggests that policy may remain restrictive for a while, leading to high real rates and presenting a greater opportunity cost for gold holders. This scenario contributes to the reduced demand from institutional entities, ETFs, and central banks since the onset of recent conflicts.
As inflation expectations rise, market concerns about stagflation and increasing interest rates along the yield curve are also intensifying. This has had a notable impact on both precious and base metals; gold has dropped approximately $700 per ounce (around 13%) since the conflict began, while silver has declined by $21 per ounce (22%), with copper remaining unchanged amidst a significant market deficit.
Some central banks have curtailed their gold purchases, facing liquidity issues stemming from ongoing conflicts and might be waiting for lower entry points aligned with support levels. From a technical analysis standpoint, gold’s 200-day moving average of around $4,258 is viewed as a critical support level. A spike in oil prices to $150 per barrel could potentially trigger a decline in gold prices to this support point.
However, if this support level holds, the overall long-term upward trend for gold remains plausible. Melek anticipates that once oil markets begin to stabilise and indicators of inflation show a downward trend, the yellow metal could recover towards the $5,200 level by the end of the year.
The insights provided emphasise the complex interplay between commodity prices, inflation, and monetary policy, hinting at future movements for gold as economic conditions evolve.
(This article was aided by artificial intelligence and reviewed by an editor.)
