Does War Drive Gold Up? This Time, Oil and Rates Weigh on Gold Prices [Weekend Money]

Correction to Early $4,000s After Record High
Central Banks Continue Buying, but Oil and Rate Pressures Weigh on Prices
Samsung Securities: "Year-End Outlook at $4,100–$4,750"

Gold is commonly regarded as a safe haven asset that rises in times of uncertainty. When a war breaks out, financial markets are shaken, or confidence in the dollar wanes, investors tend to turn to gold. However, the gold market has been somewhat complicated this year. Although the war in the Middle East is clearly a destabilizing factor, rather than serving as a positive driver, it has been acting as a negative one for gold prices.

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On September 13, Samsung Securities analyzed that gold prices have been behaving differently from the past due to international oil prices and interest rates. This year, gold reached an all-time high on January 29 at $5,781.8 per ounce, but fell to $4,015.6 by June 30. At the end of July, it hovered at $4,026.6, marking an 8.2% decline compared to the beginning of the year. The starting point was interest rates. When Kevin Warsh was nominated as the Chair of the United States Federal Reserve (Fed), the market perceived him as someone reluctant to lower rates, which triggered a correction in gold prices.

Last month, the mood briefly shifted. As gold hovered near $4,000, bargain hunters stepped in, and gold premiums at major Asian trading hubs, including China, rose again. The U.S. Treasury Department’s announcement of an expanded long-term buyback program also contributed to a weaker dollar. On August 25, gold rebounded to $4,755.

However, analysts point out that this rally differed from the "panic buying" seen in January. Ok Jihoe, a researcher at Samsung Securities, explained, “Implied volatility in the options market was 35% at the end of January, but only 24% at the end of August, and bullish premium did not return to January levels,” indicating that “the market did not see the same kind of indiscriminate panic buying as in January.”

Since late August, gold prices have become volatile again. At Jackson Hole, Chair Warsh emphasized price stability and left room for additional rate hikes. As the likelihood of a rate hike in September surged, the 10-year U.S. Treasury yield rose to 4.79%, and gold fell to $4,369. Stronger-than-expected employment data in early September also intensified interest rate pressures.

The war in the Middle East has now become another variable. Typically, geopolitical risk is favorable for gold, but this time the war is pushing international oil prices higher. The number of daily transits through the Strait of Hormuz fell from an average of 130 before the war to around 107 per week, and concerns about a Red Sea blockade have further driven up oil prices. The rise in oil prices is fueling concerns about inflation and monetary tightening, which in turn is weighing on gold prices.

Even so, structural demand for gold has not disappeared. Central banks purchased gold even during price declines. According to the World Gold Council, net purchases of gold by central banks in the second quarter totaled 288.9 tons, an increase of 62% from the same period last year. The People’s Bank of China continued purchasing gold in August, marking 22 consecutive months of net buying. As confidence in dollar assets and the Federal Reserve weakens, alternative demand for gold could strengthen further.

Ultimately, the remaining variable will be the tug-of-war between two forces. On the one hand is the alternative demand for gold created by weakening confidence in the dollar and the Fed. On the other are the inflationary and interest rate pressures driven by war-induced oil price increases. Samsung Securities forecasts the year-end trading range for gold to be between $4,100 and $4,750 per ounce, with the closing price expected to be around $4,550.

Researcher Ok noted, “As long as the deadlock between the U.S. and Iran continues, it will be difficult for oil prices to fall below $90 per barrel, and gold will be suppressed through the inflationary pathway whenever oil prices rise,” adding, “As long as the current situation persists, the Middle East conflict is unlikely to create a favorable scenario for gold.”

This content was produced with the assistance of AI translation services.