Will international gold prices rebound in the second half of the year?

The logic of “buying gold in times of turmoil” is poised to take hold. Even amidst the deteriorating situation in the Middle East, gold prices have been trending downwards, seemingly eroding their status as a relatively safe-haven asset. However, the situation changes when the timeline is altered. Professionals in the precious metals market are already preparing for another potential rise in gold prices.

“A slightly lower price, around $4,500 to $4,600 per ounce (approximately 31.1 grams), would be a good time to buy,” said a senior precious metals trader working at a UK hedge fund, believing the current correction is only temporary.

Unlike currency, gold cannot be issued by humans, and due to its limited reserves, it easily preserves value. Because it is not affected by national fiscal problems, it tends to be purchased as a safe-haven asset during times of war and economic shocks.

However, the current rise in gold prices appears somewhat weak. After breaking through a high of $5,500 in January, it fell to around $4,000 in late March, a four-month low. The decline accelerated after the outbreak of the “Iran war” triggered by the US and Israel’s attacks on Iran.

Despite this, Yoshida Tetsu, a commodity analyst at Rakuten Securities Research Institute, stated, “The logic of buying gold during times of turmoil remains. In recent years, central bank monetary policy has had an increasingly significant and unpredictable impact on prices.”

Crucially, this period of turmoil triggered a surge in oil prices. Renewed inflation concerns have intensified, and many investors believe the Federal Reserve (FRB) will not cut interest rates this year. Persistently high interest rates will reduce the investment value of gold, thus increasing selling pressure.

The strong influence of US interest rates on gold prices is due to the increased commoditization of gold. The balance of exchange-traded funds (ETFs) backed by spot gold has increased more than tenfold in the past 10 years. With the expansion of the investor base, the presence of institutional investors in the gold market who, based on US interest rates, quickly shift funds between various commodities such as stocks, bonds, and gold is also increasing.

The 2022 Ukraine crisis provides a reference for predicting future trends. Gold prices fell continuously from February to September following the start of the Russian military invasion. This is because soaring energy prices have exacerbated global inflation, prompting the Federal Reserve to raise interest rates starting in March.

However, privately, there’s a growing trend, primarily among central banks in emerging market countries, to diversify their foreign exchange reserves from dollars to gold with a long-term perspective. This is due to increasing concerns about escalating geopolitical risks and the potential freezing of dollar assets, as seen in Russia. The realization that the US would begin cutting interest rates in the spring of 2024 was immediately seen as a positive factor, causing gold prices to surge.

The situation in the current Middle East conflict is mirroring this trend. Despite increased short-term gold selling making the outlook unpredictable, demand for gold has not weakened. For example, even in March, when gold prices plummeted, the number of customers using the services of online gold trading giant BullionVault in the UK reached a record high.

The timing of a renewed rise depends on the situation in the Middle East and the movement of oil prices. Yasuyuki Matsunaga, a professor at Tokyo University of Foreign Studies specializing in Iranian politics, analyzed that “Iran and the US have significant differences of opinion, making it impossible to predict whether a permanent ceasefire can be achieved,” indicating that resolving the issue will not be easy. However, it was reported that Iran and the US reached an agreement on an immediate ceasefire on the 8th. This has led to a situation where crude oil prices have fallen while gold prices have risen.

Nicky Shiels, Head of Research and Metals Strategy at Swiss metals smelting company MKSPAMP, pointed out that gold may adjust to around $3,800 in the short term, but “by the second half of the year, factors such as the Fed’s interest rate cuts and the US political risks before the midterm elections will become apparent, pushing it up to $5,800.”

“It’s hard to believe that the distrust and fear caused by US President Trump won’t damage the valuation of US assets,” commented Adrian Ash, Research Director at BullionVault, regarding the US attack on Iran. Even with the risks of dollar assets highlighted, gold’s role as a diversification tool has not diminished.