The ongoing conflict between the US-Iran alliance and Iran, the stance of the Federal Reserve, and central bank purchasing may become key factors influencing the market. Against the backdrop of continued tensions in the Middle East, international gold prices have just recorded their most severe two-month decline in history. The traditional safe-haven asset has been under sustained pressure from a strengthening US dollar, while stabilizing and rebounding US stock markets have also diminished gold's appeal. Looking ahead, the timing of a potential US-Iran peace agreement, the Federal Reserve's policy stance, and the persistence of central bank buying could serve as important references for a potential turning point in gold prices.

Sustained Selling Pressure The military conflict involving the US, Israel, and Iran has now entered its 60th day. The conflict has disrupted global markets, sparking fears of stagflation characterized by "soaring inflation + economic slowdown." Traders had previously bet that global central banks might need to raise interest rates to curb high inflation. As gold is a non-yielding asset, higher interest rates increase its opportunity cost, thereby putting downward pressure on its price. Furthermore, disturbances in market liquidity have repeatedly triggered passive selling of gold, exacerbating the decline. According to Dow Jones Market Data, the COMEX gold near-month contract fell by a cumulative 11.77% over March and April, marking the largest net two-month decline on record.

Boris Schlossberg, a macro strategist at asset management firm BK Asset Management, noted that geopolitical factors have recently become a "counter-intuitive" driver. "This largely depends on changes in the US dollar's trajectory, which involves liquidity factors," he analyzed. He suggested that if a US-Iran peace agreement appears achievable, gold prices could rebound significantly; conversely, if US forces launch a ground invasion, gold prices could fall further.

The Federal Reserve's policy stance could influence the direction of the US dollar and US Treasury yields. This week, the Fed maintained its benchmark overnight interest rate in the 3.50%-3.75% range following the most divided vote since 1992, with three voting members dissenting due to the "accommodative bias" mentioned in the policy statement. During his press conference on Wednesday, Chairman Jerome Powell stated that the inflation dynamics triggered by the war are changing rapidly. He indicated that the Fed is moving towards removing the "accommodative bias" language and adopting more neutral phrasing (leaving room for potential rate hikes), suggesting a possible adjustment as early as the June 16-17 policy meeting, depending on developments.

With inflation remaining well above the Fed's 2% target and continuing to rise, the risks posed by the war are severe. Policymakers' confidence in their ability to lower rates has weakened, with some officials even suggesting that rate hikes might be necessary. "Inflation pressures remain broad-based, and rising oil prices are adding further inflationary pressure," said Cleveland Fed President Beth Hammack. "Based on the current outlook, I believe this accommodative bias is no longer appropriate."

Minneapolis Fed President Neel Kashkari stated that a prolonged closure of the Strait of Hormuz or further damage to Middle Eastern energy infrastructure could trigger a severe oil price shock, potentially necessitating consecutive Fed rate hikes to anchor inflation expectations. "A long-term blockade of the Strait of Hormuz or further damage to energy and commodity infrastructure in the Middle East could lead to an oil price shock far exceeding current expectations," Kashkari said in a separate statement. "We might need forceful policy responses, such as increases in the federal funds rate, even consecutive hikes, even if that worsens labor market weakness."

The blockade of the Strait of Hormuz and threats to infrastructure have pushed the international oil benchmark, Brent crude, above $100 per barrel for several consecutive weeks, reaching $126 per barrel this week. According to data from the American Automobile Association (AAA), the national average price for gasoline jumped nearly 10 cents overnight to approximately $4.39 per gallon, compared to just about $3 per gallon before the war began in late February.

Omer Sharif, President of Inflation Insights, noted that while it is currently "premature," the Consumer Price Index (CPI) for May, released before the Fed's next meeting in June, could exceed 4%—reminiscent of the inflation spikes seen during the pandemic and after the 2022 Russia-Ukraine conflict. The expected incoming Fed Chair, facing confirmation by the Senate in the coming weeks, will not only confront risks of soaring energy inflation potentially spreading throughout the economy but also pressure from rising inflation expectations. "Arguing for rate cuts in this environment is extremely difficult," he wrote. Although Fed officials describe current inflation expectations as "stable," household surveys indicate a sharp rise in short-term inflation expectations since the war began. The University of Michigan's April consumer survey showed one-year inflation expectations have surged to 4.7%.

Long-Term Outlook Remains Positive Ongoing disruptions in the Strait of Hormuz, which are pushing oil prices higher and reinforcing inflation expectations, thereby pressuring the Fed to maintain high interest rates, are creating a negative feedback loop: oil prices → inflation → high rates → pressure on gold prices.

Some institutions believe that the current correction in gold prices, which began after hitting a record high in January, is not yet over. Thomas Winmill, portfolio manager at Midas Funds, sees a realistic possibility of gold prices falling by 10%–20%. Elliot, a director at the American Precious Metals Exchange (APMEX), stated: "Based on the latest revised gold forecasts, the average gold price expectation for this year is around $4,500, with potential dips to $4,000." However, the decline is not expected to be a straight line down. Most views suggest that gold will maintain a pattern of significant volatility through 2026. "A few years ago, a $500 swing in gold prices was unheard of. But recently, gold fell from $5,400 to $4,100 in just three to four weeks. This is already extreme volatility, and high volatility is likely to remain the norm," Elliot added.

In the long term, the market generally maintains a positive outlook for gold's upward trend. Central banks accelerating the diversification of their foreign exchange reserves and reducing reliance on the US dollar are expected to be a significant driver for higher gold prices.

Jim Reid, Global Head of Macro Research at Deutsche Bank, wrote in a report: Even if overall foreign exchange reserves in emerging markets shrink to $5 trillion, if countries aim to increase the proportion of gold in their reserves to 40%, gold prices could climb to $8,000 within five years.

The latest annual report from the International Monetary Fund shows that emerging market and developing economies currently hold foreign exchange reserves of approximately $7.5 to $8 trillion. Reid believes that the long-term bull case for gold ultimately depends on sustained gold buying by emerging market central banks. "Ultimately, the long-term prospects for gold depend on how much foreign reserves emerging market central banks ultimately hold and what target allocation percentage they set for gold."

Reid found that since 2008, all net gold purchases by global central banks have come from emerging market central banks. However, gold currently constitutes only about 16% of their reserves, implying significant room for further increases. He also noted that if the old order, established after the Cold War, which cemented the US dollar's dominance in the global reserve system, undergoes a broad reversal, central banks may continue to increase their gold holdings. For decades following the Cold War, the US dollar was the undisputed core of the global reserve system, but this格局 is now being fundamentally rewritten. He added: The world has returned to an era of major power competition; the US is retreating from its commitments to free trade, alliance systems, and security guarantees, and the dollar system has been weaponized.

Juan Carlos Artigas, Global Head of Research at the World Gold Council, stated that challenges to the US dollar's reserve status make gold particularly attractive to emerging market central banks—they wish to reduce dependence on the US dollar without simply replacing it with another country's currency. Following the Asian financial crisis in the late 1990s, emerging market central banks, whose reserve assets were predominantly in US dollars, became increasingly aware of the importance of diversification. Artigas pointed out that gold benefits from this diversification trend: it is highly liquid, universally accepted, and carries no sovereign credit risk—gold is not issued by any government and is no one's liability.