Gold bounced back 4% on Wednesday, driven by a softer dollar and easing energy prices, which minimised fears about higher inflation.
A weaker dollar resulted in lower prices for greenback-priced bullion, making it more affordable for those holding other currencies.
Oil prices fell below $100 per barrel after the US President Donald Trump announced that Washington was advancing in negotiations to end the conflict with Iran, citing an important concession from Tehran.
Concurrently, reports confirmed that the US had presented Iran with a 15-point settlement proposal.
End of liquidity crunch to boost prices
Currently, gold is being liquidated for cash due to the liquidity crunch triggered by the Iran conflict, according to Ole Hansen, head of commodity strategy at Saxo Bank.
However, after this phase of forced selling and technical liquidations ends, prices are expected to rebound.
The primary drivers for this rise will be ongoing fiscal pressures, global de-dollarization efforts, and escalating risks of stagflation, Hansen wrote in a note.
“Gold and silver remain under considerable pressure as the Middle East war continues to trigger a broad macroeconomic shock across global markets, forcing investors to reprice inflation, rates, growth, and liquidity conditions simultaneously,” Hansen said.
“After many months of strong outperformance, both metals have become vulnerable, not because their strategic case has fundamentally changed, but because they had become crowded longs at a time when investors suddenly needed liquidity.”
At the time of writing, the COMEX gold contract was at $4,600 per ounce, up 3.5%, while silver was at $73.235 per ounce, up 5.3% from the previous close.
Rising crude prices contribute to inflationary pressures by increasing expenses for transportation and manufacturing.
While elevated inflation usually enhances gold’s attractiveness as a hedge, high interest rates typically curb demand for this non-yielding asset.
Interest rates and surging costs
According to CME Group’s FedWatch, investors have reduced the likelihood of a US Federal Reserve rate hike by December to approximately 16%, down from 25% on Friday.
Amid surging inflation and what may be the biggest disruption ever to global fuel supply, equity markets are selling off as well, Hansen added.
This sell-off is due to rising growth concerns stemming from surging funding costs and bond yields.
According to Hansen, Iran is delivering a broad retaliatory shock via energy markets, which is causing widening global spillover effects, given its limited remaining conventional military capacity.
On Friday, the US two-year Treasury yield surpassed the Fed funds rate for the first time in three years, Hansen pointed out.
This shift suggests an increasing probability that the Fed’s next action will be a rate hike, rather than a move toward further easing.
“Gold’s return to its 200-day moving average for the first time since 2023 highlights the scale of the reversal,” he said.
“In the current environment, gold has emerged as one of the more exposed assets, with the sell-off driven by long liquidation, stop-loss selling, and investors raising liquidity.”
Gold is being sold primarily because it is one of the few liquid assets that has appreciated over the past year, Hansen said.
Silver under more pressure
Silver has experienced greater downward pressure than gold, according to Hansen, due to its higher beta and increased susceptibility to economic fluctuations.
Hansen suggests that this white metal may decline even further.
“The sell-off accelerated following the break below $80, which from a technical perspective opened the way toward $40,” he said.
“Since then, the unwind of previously popular trades has added further downside momentum.”
Silver previously neared the 0.618 Fibonacci extension target of $60.80 on Monday, a price point that could provide initial support.
Should that level fail to hold, the 200-day moving average at $57.61 is identified as the next crucial downside support, according to Hansen.
Hansen recognised the severity of the current market correction, noting that gold has fallen by over 19% and silver has lost nearly 31% during March.
“However, on a one-year basis, gold remains up 38.3% and silver 90.0%, underscoring how strong the preceding rally had been and why the current liquidation phase is proving so intense,” he said.
“Once the dust settles and the current wave of forced selling runs its course, the outlook for gold in particular may improve again quite sharply,” Hansen added.
Concerns over fiscal debt are mounting, and the threat of stagflation is increasing.
This is due to elevated energy costs that are curbing economic growth while simultaneously fueling inflation.
In this challenging climate, policymakers have little room to maneuver, which could ultimately boost demand for gold, Hansen said.
Gold may be sought as a safeguard against macro instability and the potential devaluation of currencies, he added.
“Silver may also rebound,” he added, “but is likely to remain more sensitive to growth concerns in the near term.”
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