THE correction in the gold price this month was owing to liquidity demands from investors low on cash, said Bank of America in a recent report.
Gold is 14% weaker in the last 30 days despite the onset of hostilities between the US and Israel and Iran. Although surprising, as bullion is often the go-to asset class in times of emergency, gold’s climb-down was rational, said Bank of America.
It added that once there was resolution in the Iran war, gold would reassert its upwardly mobile trajectory as many of the factors that had seen it gain 46% in the last 12 months, such as central bank buying, remained present in the market.
“Gold tends to be widely used in portfolios as insurance to protect against extreme financial outcomes, such as war, and the financial ramifications that oſten follow,” said Bank of America analysts. “When combined with very low cash levels in global portfolios just prior to the start of the Iran war, we can see why gold would be sold by some investors as a source of liquidity,” it said.
“We view short-term gold price weakness as unlikely to be the end of now established trends that have pushed the gold price higher since 2022,” the bank said. “These include elevated central bank diversification buying, investor buying on rising financial risks (including a rising US deficit), strong Indian jewellery demand, and strong Chinese investment demand.”
“Regardless of the outcome of the war, we have no doubt that it will contribute to the wider positive sentiment towards gold and its investment case” said Metals Focus, a UK-based precious metals research house.
The failure to ensure regime change in Iran leading to a more adverserial government in Iran, and evidence of continued US unilateralism would heighten geopolitical activity and remain supportive of the metal, said Metals Focus.
Iran launched multiple waves of missiles at Israel, said Reuters on Tuesday citing Israeli military. This was after US President Donald Trump postponed a threat to bomb the Islamic Republic’s power grid because of what he described as productive talks with Iranian officials – since denied by Iran.
Markets are pricing in interest rate hikes as the war with Iran is expected to drive inflation. “That global central banks will turn more hawkish as a result has been pushing gold lower,” Ilya Spivak, head of global macro at Tastylive, told Reuters.
