Gold’s recent selloff should be attributed to a confluence of market forces rather than a single factor that led to a deterioration in its fundamentals, according to those at Barclays.
In a note published on Monday evening, the British bank listed various reasons for gold’s weakness in recent months, namely a stronger US dollar, increased appetite for stocks and a crowded positioning.
Since the start of the US-Iran war, the yellow metal has underperformed the market, and at one point, it even wiped out its entire gains on the year despite having surged to an all-time high back in January.
The move defied gold’s traditional status as a safe-haven asset during geopolitical turmoil, which Barclays’ analysts said was largely down to risk capital flowing into equities. They estimate that gains in the US dollar index and the S&P 500’s roughly 10% rise during that span together implied a decline of about 10% in gold prices.
The rest of the drop came from the unwinding of crowded and leveraged positions that had accumulated during the metal’s earlier rally, they added.
Long-term outlook intact
While Barclays acknowledged that gold could face further mark-to-market pressure in the near term, it maintained its price forecasts and broader constructive outlook for the metal.
According to the bank, the recent correction has not altered the key drivers underpinning the gold bull market, and the recent selloff was simply a “reset”.
Barclays pointed to persistent inflation risks, policy uncertainty and continued reserve diversification by central banks as factors likely to support prices over the longer term.
Inflation remains particularly important to the bank’s outlook. It estimates that every one percentage-point increase in inflation provides roughly a 5% boost to gold prices, making inflationary pressures and higher energy costs important pillars of its bullish thesis.
Barclays’ view mirrors that of UBS, which recently predicted further downside in gold prices in the near term, but kept its long-term outlook intact.
On Tuesday, gold edged slightly higher at around $4,320/oz., following a more than 3% gain the previous session.
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