(Bloomberg) — Gold (GC=F) steadied after a dramatic selloff that has pushed the metal down more than 15% since the start of the Middle East conflict.
Bullion pared earlier losses on Tuesday, following nine consecutive daily declines. Elevated energy prices resulting from the conflict have raised inflationary risks and prompted investors to ditch liquid, profitable positions in gold in favor of other assets.
Like most asset classes, gold has been whipsawed as traders face a barrage of war-related headlines. The metal slid as much as 8.8% on Monday before paring much of the drop. Fighting continued unabated even as President Donald Trump said talks were under way to end the conflict, while the Wall Street Journal reported that US partners in the Persian Gulf could join the fight.
On Tuesday, Bloomberg reported that Turkey’s central bank had discussed conducting gold-for-foreign currency swap transactions in the London market, potentially to defend the lira against volatility linked to the Iran conflict.
A key implication of the war for financial markets has been the closure of the Strait of Hormuz, along with damage to energy infrastructure in the Persian Gulf. With crude and natural gas prices surging, the prospect of higher interest rates from the Federal Reserve and other central banks continues to weigh on gold.
A similar pattern followed Russia’s invasion of Ukraine in early 2022, when an initial spike in the safe-haven commodity was followed by a months-long decline as an energy price shock rippled through markets and added to inflationary pressures.
“Gold’s price correction has seen a steeper-than-usual underperformance,” said Suki Cooper, global head of commodities research at Standard Chartered Plc, adding that it is “not unusual for gold to endure downside pressure for four to six weeks following a period of extreme distress, as gold proves to be a liquid asset in times of need.”
“What you tend to see in a big crisis like this is investors selling heavily positioned, well-performing assets in order to fund margin calls for underperforming assets — equities, bonds, whatever,” said Peter Kinsella, global head of forex strategy at Union Bancaire Privee UBP SA.
Gold performed in a similar manner in previous market shocks, he said. “Short-term shifts in pricing are all about positioning. Longer term it’s all with the monetary drivers. And that hasn’t changed.”
Although bullion has declined in recent weeks, it had previously been on a prolonged rally underpinned by factors including geopolitical and trade tensions, as well as strong central bank purchases. Some bullion-accumulating countries are energy importers, meaning a rising oil and gas bill as a result of the war leaves fewer dollars available to be recycled into gold.