Precious Metals Under Pressure: Rising Oil Costs and Hawkish Fed Expectations Neutralize Gold’s Safe-Haven Appeal

Gold and other precious metals are facing stress test as the dual impact of $103 crude oil and a strengthening U.S. dollar offsets traditional safe-haven demand. Despite the continued closure of the Strait of Hormuz and escalating tensions in West Asia, gold prices have remained muted, stuck in a tug-of-war between geopolitical fear and a higher-for-longer interest rate environment.

As Brent crude hovers at levels that threaten a global inflationary spike, investors are increasingly betting that the U.S. Federal Reserve will delay or scrap planned rate cuts. This hawkish shift has pushed the U.S. dollar to multi-month highs, making dollar-priced bullion more expensive for international buyers.

The Safe-Haven Paradox

Typically, a closure of a major maritime oil artery like Hormuz would trigger a vertical rally in bullion. However, the current market is witnessing what analysts describe as "forced liquidation."

“In previous crises, gold was the undisputed king of safety. However, we're seeing gold prices waver even as the Strait of Hormuz remains shut," notes Ankur Daga, Founder and CEO, Angara. He explains that the current dip is less about a loss of status and more about short-term liquidity dynamics.

"In periods of sharp equity corrections or broader market stress, investors often liquidate gold to cover losses or margin calls elsewhere, which can temporarily suppress prices," Daga added.

Anand K Rathi, Co-Founder, MIRA Money, agrees, pointing out that the initial phase of a crisis often triggers a flight to cash. "In the early phases of a geopolitical or financial crisis, it is usual for gold prices to drop temporarily. During big geopolitical events or war-like scenarios, there is usually a strong flight to the US dollar at the same moment," Rathi said.

Crude Oil

With crude oil at $103, the narrative for central banks has shifted from "growth support" to "inflation containment." For an oil-importing giant like India, this price point is a massive fiscal trigger. While gold is traditionally an inflation hedge, its lack of yield makes it vulnerable when interest rates stay elevated. “Crude oil at these levels is clearly inflationary for an economy like India and for the global economy as well. If inflation is high, central banks may not lower interest rates right away, which reinforces the idea that interest rates will stay high for a long time,” says Rathi. He warns that in such a market, "rising interest rates can limit gold's short-term gains because investors like assets that pay them interest."

Daga agrees that the higher-for-longer narrative is the primary headwind. “With crude oil moving above $100, inflation concerns are rising again, which increases the likelihood that the US Federal Reserve keeps interest rates elevated for longer. That is partly why gold hasn’t surged despite the West Asia conflict. Right now, inflation concerns driven by oil prices are outweighing the support gold would normally get from a softer dollar.”

Despite the near-term volatility, experts believe the structural case for gold remains intact. The current pressure is viewed by many as a consolidation phase before a potential breakout, should the economic impact of high energy costs begin to hurt global growth.

"If the conflict drags on and monetary policy eventually shifts toward easing, it would not be surprising to see gold testing significantly higher levels than where it is today," Daga noted, emphasizing that the drivers for gold, geopolitical risk and currency hedging, have not changed.

Rathi concludes that the "pain point" for the Fed may eventually become a "gain point" for gold. "If persistent inflation and higher borrowing costs begin to slow economic growth, central banks may eventually be forced to ease policy to support the economy. That scenario could become supportive for gold again over the medium term."

Also read: Iran War: Why India's Oil & Gas Explorers Expect Supernormal Earnings