Is the "Spring" Behind Gold's Rebound About to Break?

After last year's surge and setting new all-time highs at the beginning of this year, gold prices have started to decline. Gold has not only given back all the gains from earlier this year but is now down over 7% from the beginning of the year. Why is this happening?

The first blow to this precious metal comes from technical factors.

Specifically, due to heightened market volatility, CME Group raised the margin requirements for COMEX gold futures at the start of February. Higher margins mean traders need to commit more capital, which triggered positions to be liquidated and put downward pressure on gold prices.

The second blow comes from the conflict between the United States and Israel versus Iran.

In theory, geopolitical uncertainty should increase demand for safe-haven assets, but disruptions in the Strait of Hormuz triggered an energy crisis, which in turn pushed inflation higher. According to S&P Global Ratings data, the current overall U.S. CPI has risen to 4.2%, the Eurozone is at 3.2%, and emerging markets in total stand at 4.8%—up roughly 1.5 percentage points since the start of the year.

With inflation clearly above central banks’ targets, policymakers’ statements have become tougher; at the same time, some central banks such as the European Central Bank have already begun to raise interest rates.

Unlike bonds, deposits, or dividend-paying stocks, gold itself does not generate any yield. When yields rise, the opportunity cost of holding non-yielding assets also increases. In addition, a strong U.S. dollar continues to suppress gold.

Now, with the partial reopening of the Strait of Hormuz, oil prices are declining and gasoline has become cheaper. So, shouldn’t gold be rallying?

The problem is that the end of war doesn’t mean inflationary pressures will disappear overnight. This process takes several months. Therefore, the market is currently not anticipating a Fed rate cut this year, but rather pricing in one or possibly even two rate hikes. This is also why U.S. Treasury yields have been slow to fall.

Another obstacle gold faces is the strong rally in AI-related equities. This is likely to continue attracting capital flows into the stock market rather than the precious metals market, similar to what happened during previous oil price surges.

To sum up, merely ending the Middle East conflict may not be enough to trigger a "gold spring" rebound. The economic aftereffects from the Strait of Hormuz disruptions could last for several months, causing central banks to remain cautious or even passive regarding rate cuts.

Meanwhile, financial markets are forward-looking. By the time inflationary pressures subside and central banks begin to soften their tone, much of the positive impact may have already been priced into gold.