Oil prices, the Federal Reserve, and ETF funds—these three forces will determine the fate of gold.

Gold’s performance this year has been full of ups and downs. The Middle East conflict failed to make it a safe-haven asset, the Fed’s hawkish stance suppressed ETF buying, but central banks’ sustained gold purchases continued to provide a bottom support. Now, with signs of de-escalation in the Middle East situation, the market is once again calculating: for the next step in gold prices, who really calls the shots?

According to local trading desk sources, Morgan Stanley commodities strategist Amy Gower believes that oil prices, the Fed’s policy path, and ETF capital flows are the three core variables currently determining gold’s performance.

In her latest research report, she wrote: “The cooling of the Middle East situation supports gold, but a more hawkish Fed poses challenges, particularly for ETF buying. We still see upside risk for gold, but if ETFs do not re-engage, the $5,200/oz prediction will be harder to achieve.”

In other words, global central bank buying provides a floor, but ETFs are the crucial funds pushing prices higher. Without ETF inflows, gold may remain strong, but the path to $5,200/oz will be narrower.

Middle East de-escalation is positive, but the logic isn’t “safe haven”—the key is oil prices

Many people assume that an escalation in the Middle East will push up gold prices, but in this round of conflict, gold’s safe-haven attribute has hardly materialized.

During the conflict, gold did not fully play its traditional safe-haven role. The reason is that this shock is more of a “supply shock”: rising oil prices push up inflation expectations and bond yields, and high yields themselves suppress gold.

The conflict brought two specific pressures: first, rising bond yields; second, increased fiscal and external pressure for oil and gas importing countries, with some countries selling gold, Turkey being an example.

Therefore, the cooling of the Middle East situation may not be a bad thing for gold. If oil prices are lower than previous expectations, inflation pressures decrease, and central banks are under less pressure to tighten monetary policy or sell gold. In this logic, “cooling” actually removes a resistance for gold.

Central bank buying continues, but cannot replace ETFs for the final boost

Official sector demand remains one of the strongest supports for gold.

The latest central bank survey from the World Gold Council shows a record 45% of respondents expect gold reserves to increase in the next 12 months. This indicates central bank buying is not a short-term sentiment trade, but tends towards long-term allocation.

This provides a floor for gold, but it’s not the full answer. Central bank buying can support prices during pullbacks, but may not be enough alone to push gold to $5,200/oz. To reach that level, ETF funds need to re-engage.

Indian demand has shown signs of cooling. The chart shows India’s gold imports have slowed, and import tariffs were raised in May to curb purchases. Physical demand is not universally increasing across all regions.

The real drag on gold prices is the Fed: ETFs react to rates

The Fed is the biggest short-term variable for gold.

The latest FOMC statement, economic forecasts, and press conference were interpreted as hawkish, with no mention of downside risks in the labor market. As a result, the market’s pricing for future rate hikes increased, and gold prices declined.

The transmission path here is direct: gold has no coupon, and the higher the interest rates, the higher the opportunity cost of holding gold; the higher the real yield, the weaker gold’s appeal; a stronger dollar also suppresses dollar-denominated gold.

Central bank gold buying is less sensitive to interest rate paths, but ETF funds are highly sensitive. The key point in this framework is: official sector demand can persist, but ETF buying is more easily influenced by the Fed, real yields, and the dollar.

The chart illustrates the relationship clearly: gold prices have re-connected with the US 10-year TIPS real yield, with a fit R² of 0.7611; real yields are still higher than in February; during the Fed’s pause, ETFs have sold some gold.

Rate hikes may not crush gold, but $5,200 requires two conditions

Rate hikes do not necessarily mean gold will fall.

Historical samples show mixed performance for gold after Fed hikes. On average, gold actually rises 0.84% in the month after a 25-basis-point hike. This suggests that what the market actually trades is not just the “rate hike,” but changes in the dollar, real yields, and risk appetite following the hike.

The World Gold Council has listed several examples of gold rising after rate hikes: June 2006, when the Fed hiked amid growth concerns, ETF and Chinese physical demand supported gold prices; March 2017, the hike was interpreted as relatively dovish and the dollar weakened; December 2018, the hike was seen as a policy error and the Fed turned to cutting rates in 2019; November 2022, the hike happened amid a fragile market and a weak dollar; March 2023, banking sector stress pushed long yields sharply lower and the market accelerated pricing for a pause and future easing.

That’s also why gold still has upside risk. The inflation path implied in the Fed’s Summary of Economic Projections may not have fully incorporated the cooling effect from SoH reopening, and is higher than the estimates of the bank’s own economists; their path implies the Fed will stay on hold until 2026.

But $5,200/oz is no longer a problem that central bank buying alone can solve. To reach that path, at least two conditions are needed: first, oil prices decline and truly affect inflation and rate expectations; second, ETF funds stop outflows and turn back to buying.

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The above highlights come from Pursuit Trading Desk.

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