Short

The Gold Price Drop Was Not Accidental

This round of gold price decline was not simply driven by the US dollar or interest rates, but rather by the rapid compression of geopolitical risk premiums. Iran released information that the US and Iran had drafted an informal memorandum of understanding, the core of which included the restoration of commercial shipping in the Strait of Hormuz to pre-conflict levels within a month of the agreement, the lifting of the US maritime blockade, and the withdrawal of US military forces from the Iranian region. This news is not yet equivalent to a final agreement, but it was enough to change short-term asset pricing.

Previously, gold's pricing was partly driven by energy supply disruptions, shipping disruptions, and the spillover risks of the Middle East conflict. Once the market begins trading on "shipping resumption" and "cooling oil prices," profit-taking typically occurs first at the most crowded end of the safe-haven asset market. In other words, the gold price decline is not due to the disappearance of macroeconomic uncertainty, but rather the market's perception that the probability of the most extreme scenario has decreased. The decline in oil prices weakened the inflationary impact and also compressed the defensive demand for gold.

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