Gold on course to log worst yearly fall since 2013 if West Asia troubles continue. Time to sell?

Gold, long regarded as a safe-haven asset during periods of uncertainty, has moved in the opposite direction this time. International prices have fallen more than 25% from their peak of $5,586 earlier this year, even as investors grapple with geopolitical tensions and a rapidly escalating conflict in West Asia. If the decline continues, it could mark gold’s worst annual performance since 2013, when the precious metal tumbled 28%.

The drop comes despite more than 100 days of no breakthrough in peace talks involving the United States, Israel and Iran. Over the same period, benchmark indices, the Nifty and Sensex, have fallen more than 9% each, while crude oil, the world’s most important commodity hovering near the $90-per-barrel mark, has become the new normal, unsettling global markets. Traditionally, such conditions tend to support precious metals. The recent decline may appear counterintuitive given gold’s reputation as a refuge during geopolitical turmoil. However, current market dynamics are being shaped by several overlapping factors.

Crude surge

The sharp spike in crude oil prices above $90 a barrel and escalating geopolitical tensions have triggered a broad risk-off mood across markets, prompting investors to raise cash and trim leveraged positions across asset classes. A surge in crude oil prices often fuels inflation because oil is a key input for transportation, manufacturing, power generation and logistics.

Higher fuel costs increase the cost of producing and moving goods, which eventually gets passed on to consumers through higher prices. While rising inflation can initially support gold because it is often viewed as an inflation hedge, the equation changes if investors expect central banks to respond with higher interest rates. Higher rates increase the appeal of interest-bearing assets such as bonds and raise the opportunity cost of holding gold, which does not generate any income.

Morgan Stanley described the oil market as being “in a race against time,” warning that some of the factors limiting the rise in prices could weaken if the Strait of Hormuz remains closed through June. Profit booking after the strong rally in gold earlier this year and in 2025, when the metal surged 66%, has also contributed to the decline. With prices already at elevated levels, some investors chose to lock in gains as volatility increased.

“In that context, the ongoing decline appears more like a normalisation of valuations rather than a structural collapse in the asset class,” said Ponmudi R, CEO of Enrich Money. Tata Mutual Fund expects gold prices to remain range-bound in the near term amid mixed macroeconomic signals, including the prospect of higher-for-longer US interest rates, a stronger dollar and elevated bond yields. The fund house believes short-term volatility of around ±5% is likely, while developments surrounding the US-Iran conflict and intermittent ceasefire-related headlines could continue to drive price swings.

For Indian investors, Tata Mutual Fund noted that rupee depreciation is likely to provide a cushion against downside risks, helping domestic gold prices remain relatively more stable than international markets.

Over the medium to long term, however, the fund house remains constructive on gold, citing supportive structural and cyclical factors. It said any meaningful correction in prices should be viewed as an opportunity to accumulate, adding that the current environment continues to reinforce gold’s role as a strategic long-term portfolio allocation.

“I do not believe investors should completely exit gold in anticipation of a geopolitical resolution in West Asia by 2027. Timing geopolitical events is extremely difficult, and gold’s role extends far beyond conflict-driven demand. It continues to serve as an effective hedge against inflation, currency depreciation and broader financial market uncertainty,” Ponmudi added.

He said structural demand from central banks remains supportive, even if the pace of accumulation fluctuates from quarter to quarter.

For investors sitting on substantial gains after the 2025 rally, partial profit booking and portfolio rebalancing make sense, he said. The recent correction has removed a significant amount of speculative excess from the market and has made valuations healthier from a long-term perspective.

In the short term, gold is likely to remain volatile and range-bound as markets assess inflation trends, Federal Reserve policy and geopolitical developments. Over the longer term, central bank reserve diversification, rising global debt levels and periodic geopolitical disruptions continue to support the bullish case for gold.

“We view the current phase as a healthy consolidation within a longer-term uptrend rather than the end of the gold bull market.”

While US President Donald Trump has indicated that a deal with Iran could be signed as early as this week, markets have learnt to be cautious after several failed attempts at a breakthrough. Should an agreement finally materialise, it could ease concerns over oil supply, soften inflation and interest-rate worries, and provide much-needed relief to gold investors navigating one of the metal’s most volatile periods in years.