Despite bearish near-term, Gold bulls aren't down and out

Gold is only down around 7 percent on the year and has remained one of the best-performing assets over the last 12 months. However, gold has fallen around 30 percent from its mid-January highs, and the bears seem to be in control for the short term.

Analysts at Metals Focus expect gold to remain range-bound in the near term but still see upside over a longer time horizon.

Gold's bearish near-term

Interest rate expectations continue to be the primary headwind for gold. Since the oil shock at the beginning of the U.S.-Iran conflict, expectations for a rate hike this year have continued to increase. Even after the weaker job numbers in June, the markets continue to price in a high probability of an interest rate hike this year.

Since gold is a non-yielding asset, the conventional wisdom is that rising rates are negative for gold (Keep in mind it’s crucial to pay attention to real interest rates, not just the nominal rate you see in the media).

As Metals Focus analysts note, even with a peace plan apparently in the works, the situation in Iran remains uncertain and volatile.

“Looking ahead, even following the peace agreement and the reopening of the Strait of Hormuz, a normalization in tanker traffic is likely to take time, which should continue to underpin inflation concerns. Moreover, President Trump’s latest comments that the interim deal with Iran was ‘over’ highlight how fragile conditions remain, which may also keep energy prices elevated.”

Meanwhile, July and August are historically seasonally slow months for gold demand, and we were already seeing demand slow, particularly in Western markets.

“Much of this recent weakness reflects a cooling in retail investment across all major markets. Losses following the January rally, together with recent range-bound prices have discouraged many individual investors. Moreover, several key markets have been hit hard by higher oil prices, which have eroded disposable incomes.”

Higher gold prices continue to weigh on the jewelry sector. At just under 300 tonnes, global jewelry demand fell 23 percent year-on-year in Q1. A 19 percent dip in Indian demand and a 32 percent crash in Chinese sales pushed overall jewelry demand lower. It was the lowest quarter for gold jewelry demand since COVID.

As gold prices have moderated, there appears to be a bit of a resurgence in jewelry demand in both China and India. However, Metals Focus analysts noted, “These gains have come from a low base and remain modest, particularly given that both countries will only enter their seasonally stronger demand period from August or September onwards.”

Gold bulls down but not out

Despite the current headwinds, Metals Focus analysts expect gold prices to resume their bullish trend, perhaps as early as the latter part of Q3.

Despite market expectations, Metals Focus does not expect an interest rate hike this year, saying the central bank is more likely to simply hold rates steady.

Metals Focus analysts seem to recognize the Catch-22 facing the Fed. It needs to hold rates higher for longer due to stubbornly persistent price inflation. However, the level of debt in the economy makes raising rates a dangerous prospect. If the debt bubble pops, it will crash the economy.

“Although inflation is unlikely to disappear quickly, we believe policymakers will be willing to tolerate above-target inflation in order to avoid a material slowdown, let alone a recession. Under such a scenario of unchanged policy rates and higher inflation, real yields should come under pressure, providing support for gold.”

Metals Focus analysts also believe the fundamentals that supported gold throughout the 2025 bull run are likely to remain in place “for some time.”

They specifically note ongoing central bank gold demand. 

There was a brief slowdown in net central bank gold purchases in March and April as countries coped with the oil price shock. Selling by Turkey and Russia drove net purchases negative in March. However, net central bank gold holdings began climbing again in April and grew by 41 tonnes in May.

Metals Focus analysts said that gold sales and swaps were used to raise dollar liquidity, but that the need for further liquidations has diminished, “particularly following the de-escalation of tensions and the subsequent fall in oil prices.”

“Meanwhile, lower gold prices, continued US policy uncertainty and elevated geopolitical risks have encouraged many regular official sector buyers to continue adding to their gold holdings.”

The geopolitical and economic fundamentals supporting the gold bull market are also expected to remain in place.

“U.S. policy uncertainty should persist and could intensify, depending on the outcome of the mid-term elections. Concerns over the long-term outlook for the U.S. dollar are also unlikely to fade. Geopolitical risks should remain elevated, particularly given the precedent set by recent U.S. unilateral actions and Iran’s recognition of the strategic leverage offered by the Strait of Hormuz. Finally, equity valuations have become even more stretched. Against this backdrop, gold’s role as both a safe-haven asset and a portfolio diversifier remains as important as ever.”