Gold: The floor has been found, but where is the ceiling?

The US dollar staged a four-day growth against the backdrop of air strikes on Iran. Rumours of a temporary ceasefire have not been confirmed, pushing Brent to near $93 per barrel and fuelling inflation fears. The odds of two Fed rate hikes in 2026 are estimated at 50/50, supporting the USD. 

This makes the gold rally all the more surprising, as a strong dollar and rising Treasury yields are typical headwinds. However, this time demand is supporting the precious metal. Capital outflows from ETFs have given way to inflows. The 7.4-metric-tonne increase in holdings of specialised exchange-traded funds on 21 July was the month’s largest. Hedge funds have increased their net long positions in gold to a five-week high.

It is likely that the resilience of support at $4,000 per ounce, together with gold’s poor performance in previous periods, has led investors to view the precious metal as oversold. By the end of June, it had recorded its worst monthly performance since the 2008 global economic crisis, falling at its fastest pace since 2013.

During this period, pressure on gold prices was fuelled by rumours that central banks in the Gulf states were selling bullion via intermediaries. Turkey was the main focus of these rumours. Its gold reserves fell by 81 tonnes in the first half of the year, equivalent to $10.6 billion at current prices. The June deal between the US and Iran was, in theory, intended to halt this process, but the escalation of geopolitical tensions could accelerate it. 

Despite the price rebound, the external backdrop remains highly unfavourable. The higher Brent climbs, the more likely it is that high inflation will become entrenched in the US economy. At the same time, the Fed’s shift from verbosity to brevity is alarming investors. Under these conditions, the likelihood is growing that the central bank will tighten monetary policy without warning.

The strengthening of the US dollar has pushed USDJPY above 163 for the first time in four decades. This has prompted government officials to step up their verbal interventions. Finance Minister Satsuki Katayama has ruled out taking bold and decisive action if necessary. 

Summary: Gold is rising despite the strong dollar and bond yields: investor demand and the $4,000 level are providing support, but inflation and the Fed remain risks.