With all the talk of a commodities super cycle, it’s not surprising that gold is in the spotlight, but clients may be surprised to learn why the yellow metal is attracting so much attention of late.
To be fair, popular bullion-backed ETFs are essentially flat over the past month, but that’s of little compensation to investors that owned those products or gold itself at the start of the war in Iran because in the month that followed, the yellow metal tumbled, belying its safe reputation in the process.
“In March, the first month of the conflict, gold fell 14.5%, while the FTSE All-World Index dropped 9%, the S&P 500 lost 7.8% and the U.S. Treasury Total Return Index declined 3.6%. This marks a notable departure from prior geopolitical crises, when gold typically outperformed and provided protection during downturns,” according to Morgan Stanley.
Translation: gold betrayed its safe haven status at the very time investors rightfully expected it to provide some shelter from the storm. However, it’s not as surprising as it seems.
Gold Questions Abound
In theory, the war in Iran should have been the perfect storm. Obviously, it’s a war and alone, that should’ve been enough to stoke some upside for the commodity. Moreover, the conflict led to surging oil prices and thus higher inflation. Elevated inflation is usually a recipe for gold upside.
However, this shift isn’t as surprising as it seems because although it has an impressive inflation-fighting track record, gold isn’t guaranteed to follow inflation to the upside. This year, higher inflation likely means the Federal Reserve can’t cut interest rates and bullion is responding to that, meaning the commodity is an interest rate story.
“Gold’s sensitivity to monetary policy has taken over as the key price driver,” Gower notes. “This has overshadowed its safe-haven status and reduced its effectiveness as a hedge against both geopolitical and inflation risks. Gold prices reflect not just the impact of a particular event but, more importantly, the policy response that follows.”
As advisors know, gold often is a rate story because when Treasury yields are high, the commodity is less attractive because it doesn’t pay dividends or interest payments. Further adding to gold’s recent woes is the fact that some global central banks, once devoted bullion buyers, took some profits in March, adding to the selling pressure.
Bullion Can Bounce Back
A prolonged conflict with Iran would likely be problematic for gold, but working on the premise that resolution is near, there are reasons to believe gold can rebound. Those include recent data indicating gold ETFs (meaning advisors and retail investors, among others) are seeing inflows and central banks are renewing their bullion buying enthusiasm.
“With central banks and ETFs resuming purchases—and expectations for the Federal Reserve to remain on hold for the rest of 2026—Morgan Stanley Research forecasts gold prices could rise to $5,200 per ounce in the second half of the year, about 9% above April 22 levels,” adds Morgan Stanley. “This outlook is less optimistic than an earlier projection of prices reaching as high as $5,700 per ounce under a more bullish scenario.”
Related: Dividends Are Familiar. Buyback Aristocrats Could Be the Next Advisor Opportunity.