Posthaste: Gold’s fall from grace could be worse than markets expect

Gold prices have fallen 16 per cent since war broke out in the Middle East. Photo by Getty Images

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Prices for bullion have fallen 16 per cent since war broke out in the Middle East as inflation fears rise and prospects for interest-rate cuts fade.

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Some see this as a buying opportunity, but others argue that it is just the beginning of a long slide.

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Capital Economics estimates gold prices will fall to US$3,500 by year end, a US$1,000 drop that is bigger than consensus currently predicts.

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Bullion prices have been hit by a rise in real yields and the U.S. dollar brought on by the Iran conflict, but Capital argues that other drivers that helped gold hit record highs last year are also losing steam.

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“Even if the conflict were to de-escalate soon, the same forces that had driven the gold rally could go into reverse and trigger further falls in prices this year,” said Hama Hussain, Capital’s climate and commodities economist.

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A buying binge by central banks and private Chinese investors helped push gold prices from around US$1,810 in late 2023 to nearly US$6,000 in early 2026.

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“But those tailwinds for gold could be going into reverse or, at the very least, becoming weaker,” he said.

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Central bank’s net purchases slowed by about 80 per cent in January, according to International Monetary Fund data — and some countries such as Russia and Turkey have sold gold this year.

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Speculation also fuelled gold’s ascent both in China and the West, with bullion behaving more like a risky asset than a safe haven, as it has been traditionally regarded.

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Now the market’s risk-off mood is working against it.

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“Taking a step back, the momentum that had supported prices now appears to be shifting against gold,” said Hussain.

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Others remain bullish in the long-term. Robert Embree, of Rosenberg Research & Associates Inc., said most of the drop in prices is related to positioning, a flight from speculative capital and a liquidity crunch.

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The gold trade had become overcrowded and the “weak hands are now bailing,” he said.

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The price drop is not unprecedented. Gold fell about 20 per cent after the Lehman crash in 2008 before soaring again.

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Rosenberg Research trimmed its position in gold and is now looking for the most attractive entry point which it sees as around US$4,390.

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“All of this suggests that we are getting closer to a juicy re-entry point, but may not be there yet.”

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Gold was trading at US$4,570 an ounce this morning.

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Inflation pains from the Middle East conflict will extend far beyond the gas pump, economists warn — and are already showing up in some unexpected places.