After a year of repeatedly hitting new highs, gold is now experiencing its most severe correction in recent years.

Despite escalating conflict in the Middle East and concerns over global energy supply due to the Strait of Hormuz blockade, gold has failed to demonstrate the resilience expected of a traditional safe-haven asset. Instead, it has fallen more than 20% from its March peak, officially entering a technical bear market. This anomaly highlights that the primary drivers of gold's price are no longer geopolitical risks, but rather the repricing of inflation, interest rates, and liquidity.

With the US May CPI rising 4.2% year-on-year, reaching its highest level since 2023, market expectations for a Federal Reserve rate hike this year have intensified. According to CME FedWatch data, the probability of a 25-basis-point hike in December has surged from 14% a month ago to 43%. A stronger US dollar index and persistently rising Treasury yields are creating significant headwinds for the non-yielding asset.

Simultaneously, the correlation between gold and risk assets is strengthening. FactSet data reveals that since June, the correlation coefficient between gold and the Nasdaq 100 Index has been as high as 0.91. When both geopolitical and inflation risks rise, investors are increasingly favoring cash, US dollars, and bonds over gold, causing this traditional safe haven to lose its previous independent pricing logic.

While most institutions maintain a long-term bullish outlook on gold, the immediate outlook suggests that the situation in the Strait of Hormuz, tightening global liquidity, and rising real interest rates may continue to pressure the metal in the short term.

Interest Rates Emerge as Gold's Primary Adversary

The core driver behind gold's recent decline is not geopolitics, but interest rates.

US Labor Department figures show the May CPI rose 4.2% year-on-year, the highest level in over two years. Concurrently, the addition of 172,000 new jobs in the US significantly exceeded market expectations, reinforcing perceptions of the US economy's resilience.

Chris Gaffney, Head of Global Markets at EverBank, stated that the recent sell-off in gold is essentially a result of the repricing of the interest rate path. As markets begin to discuss rate hikes instead of cuts, the opportunity cost of holding gold has risen markedly.

Market data shows the yield on the 30-year US Treasury has surpassed 5%, while the 10-year yield has risen above 4.5%. For gold, which generates no cash flow, higher real interest rates translate to lower relative attractiveness.

Consequently, the analyst team led by Kenny Hu at Citi has lowered its three-month gold price target from $4,300 to $4,000, warning that if the Strait of Hormuz blockade persists into late summer, prices could even fall toward $3,500.

Why the Hormuz Crisis Has Not Boosted Gold

Conventional wisdom suggests that war benefits gold. However, the current Middle East conflict is producing a very different outcome.

Several institutions point out that the key reason is this conflict's primary impact on energy supply rather than the financial system itself. The blockade of the Strait of Hormuz has caused a sharp rise in oil prices, which in turn has elevated global inflation expectations. In this scenario, the market's primary concern shifts away from safe-haven demand toward the likelihood of central banks maintaining or even increasing high interest rates.

Research indicates that high oil prices create a macroeconomic shock akin to stagflation, not a typical safe-haven environment. Rising energy costs compress global demand and liquidity, negatively impacting most asset classes except energy itself, including precious metals and industrial raw materials.

From this perspective, gold is not a beneficiary of the safe-haven trade but has instead become one of the casualties of the liquidity contraction triggered by the energy shock.

Gold's Status as an Independent Safe-Haven Asset Erodes

More notably, the correlation between gold and risk assets has increased significantly.

Michael Armbruster, co-founder of Altavest, noted that gold has recently been moving almost in sync with US stocks. It rises when the Nasdaq rises and sells off when the Nasdaq falls.

Market analysts suggest that as liquidity tightens, gold is increasingly being viewed as a source of funding rather than a safe haven.

This trend is also evident in ETF flows. Over the past two years, assets related to artificial intelligence have consistently attracted global capital inflows, while gold ETF performance has been notably weaker. As funds concentrate into AI, semiconductors, and leveraged products, gold has gradually lost its previous status as a capital safe harbor.

Meanwhile, gold recently broke below its 200-day moving average for the first time in two and a half years. Ole Hansen, Head of Commodity Strategy at Saxo Bank, stated this signifies a major setback for the four-year technical bull market and has triggered further outflows from algorithmic and trend-following trading funds.

Central Bank Demand and De-dollarization Thesis Remain Intact

Despite short-term pressures, most institutions have not abandoned their long-term optimistic view on gold. Citi maintains its $5,000 price target for the next 6 to 12 months. Yardeni Research similarly maintains its year-end target of $5,500 and a long-term target of $10,000.

The core logic supporting the long-term view remains unchanged. First is the continued rise in global debt levels. The market consensus is that in a high-debt environment, central banks will find it difficult to sustain high interest rates over the long term, making future monetary easing the likely direction.

Second, demand for gold from global central banks persists. Over the past few years, central banks have been the most stable buyers in the gold market. For many countries, gold is no longer just a safe-haven asset but a crucial reserve tool for hedging against risks within the US dollar system.

Furthermore, shifts in the geopolitical landscape and the restructuring of the international monetary system continue to support gold's strategic allocation value. Christopher Louney, an analyst at RBC Capital Markets, believes the recent price correction is more a sign of temporary waning market interest rather than a breakdown of the long-term thesis.

Market Focus Shifts to Two Key Variables

Gold's future trajectory will primarily depend on two key variables.

The first is when the Strait of Hormuz will resume normal navigation. If energy supply gradually recovers and oil prices retreat, market concerns over inflation and further rate hikes would likely ease.

The second is when US Treasury yields will peak. The greatest current pressure on gold stems from persistently rising real interest rates. If the Federal Reserve concludes its "price discovery" phase and the bond market stabilizes, the liquidity headwinds facing gold could diminish.

Therefore, in the short term, gold remains under the triple pressure of interest rates, the US dollar, and liquidity. As one report succinctly put it: "Without the Strait opening, gold will struggle to rise."

However, from a longer-term cyclical perspective, factors such as global debt expansion, central bank gold purchases, de-dollarization, and rising fiscal deficits remain unchanged. This suggests the current bear market is more akin to a sharp correction within a long-term bull cycle, rather than the end of the trend.