TD Securities’ Head of Commodity Strategy, Bart Melek, argues that Gold is under pressure as Oil-driven inflation keeps real rates elevated and raises the opportunity cost of holding the metal. He notes institutional, ETF and central bank demand has weakened, with technical support seen near the 200-day moving average around $4,258 and a year-end recovery toward the $5,200 range once Oil stabilizes.

High real rates cap Gold upside

"In sharp contrast to most other commodities, gold benefits from being a monetary metal and tends to perform well when inflation rises. However, this is usually only true when monetary policy is not actively attempting to suppress inflation by sharply increasing real rates, as was the case back in 1979-82."

"Given the current negative supply shock, there is a risk that policy will remain relatively restrictive, implying high real carry and a high opportunity cost of holding gold. This is likely why demand from institutional investors, ETFs, and central banks has been weak since the start of the war."

"With that, inflation expectations would almost certainly rise further, and markets would once again grow increasingly concerned about stagflation and higher interest rates across the yield curve. These concerns have already weighed heavily on precious and base metals. Gold is down roughly $700/oz since the conflict began (–13%), silver has fallen $21/oz (–22%), and copper has remained flat despite a deep market deficit."

"Some central banks have slowed purchases because of liquidity constraints associated with the war and may be looking for a lower entry point near support levels. From a technical perspective, gold’s 200-day moving average, currently near $4,258, represents a major support level. An oil spike to $150/b could push the yellow metal down to this level."

"But as long as that level broadly holds, the longer-term uptrend remains intact. Once the oil market starts to stabilize and inflation signals point lower, we expect the yellow metal to move back into the $5,200 range by year-end."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)