While geopolitical tensions support gold prices, recent market behavior suggests that they alone are insufficient to fuel a sustainable bullish trend.
Experts believe gold is likely to fall further as energy prices rise, fueling higher inflation over time.
Macro factors, including real yields, the US dollar, and interest rate expectations, remain the main constraints on further increases, according to ING Economics.
Higher energy prices, a strengthening dollar, and shifts in interest rate expectations have reduced demand for safe-haven assets.
Gold prices on the COMEX plummeted by over 8% on Monday to reach their lowest since November 25 last year. Prices hit a low of $4,128.70 an ounce.
The contract had recovered some losses and was trading around $4,301 an ounce at the latest session.
Macroeconomic forces prevail
Even with the escalation of conflict in Iran, gold prices have dropped by 25% since reaching their peak on January 29.
This decline underscores the persistent dominance of macroeconomic factors, such as interest rates, the strength of the US dollar, and asset class positioning, on short-term price movements.
“More broadly, geopolitics on its own rarely sustainably drives gold prices; what matters is how these shocks impact inflation, monetary policy, and the dollar,” said Ewa Manthey, commodities strategist at ING Economics, in a report.
“In the short term, a stronger US dollar and the high liquidity of gold can make it a source of funding during episodes of tension.”
Energy prices and inflation
High energy prices, fueled by escalating geopolitical tensions, pose a risk of persistently high inflation, complicating monetary easing prospects.
A prolonged period of high interest rates would maintain high real yields, creating a challenging environment for gold.
While the Federal Reserve kept rates steady this week, Chairman Powell emphasized the need for clearer evidence of inflation progression before any further easing, ING’s economist anticipates two 25-basis-point rate cuts later in the year, in September and December.
“However, a stagflationary environment – slower growth combined with persistent inflation – would remain favorable for gold in the long term,” Manthey added.
The US central bank recently highlighted rising inflation concerns and indicated it would exclude any further monetary stimulus if elements suggest inflation is unlikely to reach its target in the medium term.
“Gold prices will likely continue to decline as energy prices rise further, threatening to push longer-term inflation expectations higher,” said Thu Lan Nguyen, FX and commodities research head at Commerzbank AG.
Central bank purchases slow down
Gold demand continues to be supported by central banks, although the pace of purchases has slowed.
According to World Gold Council data, net purchases in January totaled 5 tons, significantly lower than the 2025 monthly average of 27 tons, indicating a weaker start to the year.
Despite this, the composition of flows suggests sustained structural interest. Uzbekistan’s purchases, for example, exceeded Russia’s sales.
Furthermore, the emergence of new buyers like Malaysia and the possible return of the Bank of Korea indicate a gradual diversification of the gold demand base.
<p"That said, while official sector demand remains structurally supportive, reflecting a continued shift in reserve management away from the US dollar, it is unlikely to drive short-term price movements," said ING's Manthey.
Short-term price movements will likely be primarily determined by investment flows, although central banks may take advantage of lows to strategically bolster their reserves, she added.
The Middle East, a key gold buyer
An important factor is the Middle East, especially Dubai, which is a central hub for gold trading.
“The war at its doorstep is expected to impact local gold demand,” said Carsten Fritsch, commodities analyst at Commerzbank.
Private households in the Middle East acquired a substantial 270 tons of gold last year, buying it in the form of jewelry, bars, and coins, according to World Gold Council data.
This quantity covered global demand, representing 10% of the total.
This figure exceeded observed demand in both the US and Europe. A significant portion, over 70 tons, was attributable to Iran alone.
<p"This demand is now likely much lower due to the war," Fritsch said.
Continued constructive outlook
“We remain overall bullish on gold, although short-term risks have increased,” Manthey said.
While the metal has risen since the start of the year, the gold market remains prone to profit-taking episodes.
However, significant dips should attract buyers, especially central banks and long-term investors.
<p"In the end, the direction of gold will depend less on geopolitical headlines alone and more on how these events influence inflation, monetary policy expectations, and real interest rates," Manthey added.
<p"For now, it's macroeconomic forces, not geopolitics alone, that are driving gold prices."
