The expectation that the Middle East will move towards a long-term peace agreement is helping the financial market gradually stabilize, as the USD's safe-haven role declines and market volatility cools down, thereby supporting stocks.
Talking to Kitco News, Mr. Michael Brown - Senior Market Analyst at Pepperstone - said that the 4,800 USD mark is the first important threshold that gold needs to overcome to strengthen investors' increasing confidence.
He said that although the market is moving towards the possibility of reaching a peace agreement, gold investors are still cautious. According to him, the market still needs time to "absorb" the speculation that pushed prices to a record level in January.
Notably, gold weakened even as the USD remained around the 98-point mark – near its lowest level since the end of February.
We are seeing gold move like a high-sensitivity risky asset rather than a safe-haven asset. The precious metal also shows very low correlation with traditional factors such as the value of the USD or real yield," he said.
According to Mr. Brown, in the current context, the outlook for gold largely depends on whether the Middle East conflict continues to cool down or not. If the downward trend of tension is maintained, gold prices are likely to still be supported and may continue the upward trend.
From a longer perspective, he believes that gold may regain its role as the market shifts its attention from conflict developments to assessing the economic losses left behind.
He also assessed that the US economy is in a better position to cope with current shocks, as it is both a net energy exporter and has a stable consumer base before conflict breaks out. The recovery momentum of the stock market also helps maintain the "asset effect", thereby supporting spending by high-income groups.
Conversely, the European Union and the UK – regions heavily dependent on energy imports – are facing greater risks. Mr. Brown warned of the risk that central banks such as the European Central Bank or the Bank of England may make inappropriate policy decisions when dealing with inflationary pressures.
This raises the question of whether the market will react positively to interest rate hikes due to higher yields, or vice versa, concerns about negative impacts on growth will make investor sentiment become cautious.
In this scenario, gold may benefit when investors look for hedging tools against economic growth decline risks.
