Key Takeaways
- Gold faces its steepest weekly decline in more than a month, dropping approximately 3%
- The US dollar has strengthened by 1.5% this week, pressuring gold valuations
- Escalating conflict between the US-Israel alliance and Iran has driven oil prices upward while dampening Fed rate cut prospects
- Market participants now anticipate only 35 basis points in Federal Reserve cuts before year-end, a reduction from 60 basis points predicted last week
- Market participants are liquidating gold positions to generate cash for covering shortfalls in other asset classes
Despite a stellar performance throughout the year, gold has encountered significant headwinds this week. The yellow metal is poised for its first weekly decline since the final days of January, occurring paradoxically as Middle Eastern hostilities continue to intensify.
On Friday morning in London, spot gold was changing hands near $5,089 per ounce, showing a modest 0.2% daily gain yet remaining approximately 3% lower for the week. This trajectory threatens to end a four-week rally.
The decline appears counterintuitive given gold’s traditional role as a protective asset during periods of geopolitical turmoil and market volatility. Market experts attribute the downturn to several converging factors.
The US dollar has experienced a powerful rally this week, advancing 1.5% — marking its most substantial weekly climb since October 2024. When the dollar strengthens, gold becomes costlier for international buyers using alternative currencies, typically exerting downward pressure on valuations.
Yields on US Treasury securities have also climbed consecutively for four sessions, reaching multi-week peaks. Elevated yields increase the opportunity cost associated with holding gold, an asset that generates no income.
Middle East Conflict Stokes Inflation Concerns, Diminishes Rate Reduction Expectations
The intensifying military engagement between the US-Israel coalition and Iran has propelled oil prices substantially higher. Crude oil is tracking toward its most significant weekly surge since 2022. The strategically crucial Strait of Hormuz, responsible for facilitating substantial global oil shipments, is currently effectively blocked.
Iranian forces have targeted energy facilities across multiple nations. President Donald Trump has indicated his intention to play a role in determining Iran’s future leadership, while his administration explores strategies to address escalating fuel expenses.
Elevated crude prices are amplifying concerns about inflationary pressures. This development has prompted market participants to reduce their expectations for Federal Reserve monetary policy easing. According to the CME FedWatch tool, there’s now a 69% probability the Fed maintains current rates at its June policy meeting, up substantially from 43% merely seven days earlier.
Interest rate reductions typically provide tailwinds for gold prices. Diminished expectations for such cuts represent a negative catalyst.
Market Participants Liquidating Gold Holdings to Generate Liquidity
Adrian Ash, a researcher at BullionVault, characterized the selloff as typical crisis-driven market behavior. “What we’re seeing right now is classic crisis trading: investors cutting risk, selling whatever they can for cash and covering margin calls elsewhere,” he said.
He noted that gold’s substantial year-to-date appreciation positioned it as one of the limited assets traders could liquidate while still booking gains.
Gold maintains nearly 20% gains for the year. A widespread equity market downturn this week has also compelled some market participants to tap gold holdings as a liquidity source.
Silver climbed 1.1% on Friday, reaching $83.08 per ounce. Both platinum and palladium posted gains as well.
Israeli military officials announced Friday that operations are transitioning to the “next phase” of their Iran campaign. Defense Secretary Pete Hegseth indicated that US military capabilities in the region are “about to surge dramatically.”
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