The next leg higher for gold may not require a fresh geopolitical crisis and could instead begin with a de-escalation of existing conflicts.

According to reports, Citi expects gold to reach $4,500 per ounce within three months and $5,000 per ounce in six to twelve months if the Strait of Hormuz reopens and the conflict between Yemen and Saudi Arabia eases before year-end.

Max Layton, Citi's global head of commodities research, believes that easing Middle East tensions would drive international oil prices sharply lower, prompting the Federal Reserve to shift from rate hikes to rate cuts. That policy pivot is expected to boost gold investment demand and reignite a rally driven by global trend-following funds.

The summary of the research report circulating in the market shows that Citi's key judgment is not further escalation of geopolitical risk, but rather a reversal in inflation and monetary policy expectations once energy supply returns to normal.

Oil Price Decline Could Shift Fed Policy Direction

Citi's gold forecast rests on two important premises: the reopening of the Strait of Hormuz and the easing of the Yemen-Saudi conflict before year-end.

The Strait of Hormuz is a critical global energy transportation corridor. Persistent shipping disruptions and regional conflicts push up energy prices and transmit pressure to global inflation.

During this round of Middle East conflict, gold's performance diverged from traditional safe-haven logic. Despite rising geopolitical risk, high oil prices pushed up inflation expectations, which instead reinforced expectations that the Fed would maintain tight policy, weighing on gold prices.

The logic behind this is that rising energy prices increase inflationary pressure, making the Fed more inclined to keep rates high or even continue hiking. Rising interest rates and real yields raise the opportunity cost of holding gold, which generates no interest income, weakening investors' willingness to buy.

Citi believes that if the Strait of Hormuz returns to normal navigation, energy supply pressure is expected to ease and international oil prices could fall sharply. Inflationary pressure would then diminish, and the Fed could shift from rate hikes to rate cuts.

Once monetary policy expectations reverse, falling yields would help gold regain investment demand. Global trend-following funds could also re-enter the market, driving a new rally in gold prices. This makes Brent crude prices and shipping conditions in the Strait of Hormuz important leading indicators for observing gold's trajectory.

Rather than focusing solely on whether Middle East conflicts escalate, investors also need to watch whether energy prices can continue to decline and whether such changes begin to be reflected in Fed policy expectations. Before these conditions truly materialize, gold still faces short-term risks from elevated energy prices, persistent inflationary pressure, and reinforced expectations of Fed rate hikes.

Structural Tailwinds Remain, Gold Could Return to $5,000

Citi's optimistic view on gold does not depend entirely on short-term stimulus from easing Middle East tensions. Layton noted that multiple long-term structural tailwinds already exist in the gold market. Even if geopolitical risk declines, these factors could still provide support for gold prices.

In late January this year, gold set an all-time high near $5,600 per ounce. At that time, the war between the United States and Iran had not yet broken out. Since then, as Middle East tensions escalated and energy prices rose, gold came under significant pressure and has been trading well below its historical peak.

Citi's current target prices are $4,500 per ounce over the next three months and $5,000 per ounce over the next six to twelve months. This means gold could recover a substantial portion of its earlier decline but would still remain below the record set in January.

This forecast also upends traditional gold trading logic. Typically, escalating geopolitical conflict is seen as a positive for gold, with investors allocating to gold to hedge against war and financial market risks. But in this round of conflict, high oil prices pushed inflation and rate expectations higher, which instead suppressed gold prices.

The next rally scenario outlined by Citi is exactly the opposite: if the Strait of Hormuz reopens, regional hostilities gradually ease, and falling oil prices push the Fed toward rate cuts, gold could instead gain stronger upward momentum.

Therefore, the key validation factors for this forecast will be whether the Middle East situation achieves lasting de-escalation, particularly whether the Strait of Hormuz can sustain normal navigation and whether hostilities between Yemen and Saudi Arabia can cool before year-end.

For the gold market, the end of the crisis may be precisely the starting point of the next bull market.