Although high yields, strong USD and profit-taking activity are creating pressure in the short term, the fundamental factors that once pushed gold prices above 5,000 USD per ounce have not disappeared, and the long-term trend of this precious metal is still assessed to be upward, according to Ms. Emily Avioli - Vice President and Investment Strategist at Merrill.
In the latest capital market outlook report, Ms. Avioli said that in the context of rising inflation and conflict with Iran causing investors to worry, gold should have had a more positive development, but in reality it is not.
She said gold prices have fallen by about 16% since the Middle East conflict broke out, showing that the attractiveness of the precious metal has weakened. In the past four weeks, gold has tended to fluctuate in the same direction as risky assets, going against its traditional role as a safe haven asset against geopolitical risks.
According to Ms. Avioli, this development does not reflect a change in the fundamentals of gold, but mainly stems from technical factors such as market position, interest rate expectations, and fluctuations in the USD.
She believes that the current adjustment is after a period of prolonged strong increase. Thanks to large buying power from central banks and the return of interest from individual investors, gold prices have increased sharply since 2022 and exceeded the 5,400 USD per ounce mark in January. According to the rule, after short periods of strong increase, the market usually needs a period of accumulation or adjustment to absorb the previous increase, and this is happening with gold.
She also believes that investment positions in the market have become too "thick" after a historic increase, causing many investors to take profits as risk avoidance sentiment increases after the war broke out. Gold sales to increase liquidity were further boosted as cash flow of investment institutions fell to a record low in January.
In addition, rising yields are also a factor putting pressure on gold prices. Rising energy prices have raised concerns about inflation, thereby changing expectations about monetary policy. The market has now reversed expectations of interest rate cuts, and even the possibility that the US central bank may raise interest rates in the next step has emerged. As real yields increase, the opportunity cost of holding gold, which is not profitable, also increases, causing the relative attractiveness of precious metals to decline compared to profitable assets.
The strengthening USD is also a factor putting pressure on gold prices. Since the conflict began, investors tend to turn to the USD as a safe asset. Historically, gold has often been seen as a channel to replace the USD and tends to fluctuate in the opposite direction to this currency.
However, according to Ms. Avioli, short-term unfavorable factors do not change the long-term drivers that have supported gold prices in recent years. A large budget deficit is still a concern, the USD is likely to return to a weakening trend and central banks still have the motivation to diversify reserves.
She believes that as instability related to the Middle East conflict gradually subsides, these supporting factors will return to dominate the market.
In that context, gold is still considered an asset that plays an important role in diversifying balanced investment portfolios.
