Interest Rates & Stronger Dollar Create New Headwinds for Gold

After an initial safe-haven boost at the onset of the Iran war, gold corrected and has behaved more like a risk asset. However, HSBC analysts say the de-dollarization trend still makes the yellow metal a good long-term investment.

As we've noted here before at Money Metals, wars in the modern era often do not have a major impact on the gold price beyond an early safe-haven bid. After a brief initial spike, other factors in the economy have tended to drive the gold price, particularly the trajectory of monetary policy.

This has proved true during the current conflict. Gold initially surged to $5,400 an ounce at the onset of hostilities but quickly corrected and then sold off.

As oil prices spiked, inflation worries threw a wet blanket on hopes for Federal Reserve interest rate cuts. Some analysts have even predicted a new hiking cycle. This has created significant headwinds for gold as a non-yielding asset. While we don’t think this case against gold stands up to scrutiny, the narrative does seem to be currently controlling the market.

HSBC analysts noted that interest rate worries and a strong dollar have created significant headwinds for gold since the war kicked off.

But they pointed out that gold’s performance during the tightening cycle in 2022 and 2023 undercut the narrative that gold can’t chart gains in a higher-rate environment.

Meanwhile, the relationship between real rates and gold appears to have broken down. Gold is effectively serving as a risk asset in the current market, with speculators and traders in control.

“Ownership has shifted towards retail and other leveraged buyers, many of whom are forced to liquidate holdings in periods of market stress,” HSBC said.

Meanwhile, the war may well accelerate this trend as more countries become wary of the weaponization of the dollar. The war will also drive more borrowing and spending, further eroding Uncle Sam’s abysmal fiscal situation. Many countries are already becoming wary of loaning a bankrupt U.S. government more money.

We're already seeing evidence in this with India bypassing the dollar in some oil transactions.

The U.S. dollar isn't in danger of losing its reserve status anytime soon. However, that doesn’t preclude a diversification of reserves and a modest decline in dollar demand.

Even a modest decline in dollar reserves spells trouble for an economy that depends on foreign dollar demand to support its money-printing habit. If the world needs fewer dollars, they will begin to return to the U.S., causing a dollar glut. This will increase inflationary pressure domestically as the value of the U.S. currency further depreciates. In the worst-case scenario, the dollar could collapse completely, leading to hyperinflation.

We've had a lot of new money come into the gold market, and that led to a parabolic rally in January. When a market goes up like this, it really invites volatility. Just because gold is a safe haven and a quality asset doesn't mean it's not going to be volatile.

Let’s take a look at where the market closed the week. With today being Good Friday global markets are closed and thus the prices are fixed. With that said, Money Metals is open for business as usual both today and Saturday.

Gold rose nearly $200 on the week and closed Thursday at $4,687, good for a 4.3% weekly advance during this holiday shortened week.

Silver meanwhile rose an even $4 and trades at $73.75, advancing 5.7%. Platinum climbed 7.0% to close at $1,997 an ounce.

And finally, palladium was the biggest winner among all the precious metals this week, rising 9.7% to come in at $1,521 an ounce.

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