The US and Iran have agreed to end the war in West Asia. The stock market uptrend could resume if the understanding between the US and Iran actually holds over the next week or two.
There are speculations about the Nifty on Dalal Street. But what about gold?
Here’s the price of gold over the last one year…
Gold, as a safe-haven investment, was clearly on investors' and traders' minds following the outbreak of war in West Asia. And sure enough, the price of gold initially went up, but then came the correction.
And now that the war appears to be over, what is the outlook for gold after the war? Let us explore
Reasons for the Pressure on Gold
#1 Easing geopolitical tensions
Gold has enjoyed the status of a 'safe haven' for thousands of years. Financial stability is an integral part of the yellow metal’s appeal. It tends to hold its value in a crisis. Investing in gold is the cave investors hide in amid fear, and when other investment ideas run out.
The war was the latest case of fear in the financial markets.
However, with the end of hostilities, the fear factor which played a role in influencing the price has reduced, at least temporarily.
#2 Dollar strength
Due to the Iran war continuing for longer than initial expectations, financial markets were spooked. The disruption to the crude oil market due to the closure of the Strait of Hormuz, was a bigger worry.
This is because consumers in developed nations are ill-equipped to handle high inflation driven by high oil prices. Add to that the economic impact of the disruption in energy trade. So, there is a high probability of an economic slowdown before a recovery.
Whenever there is a concern in financial markets about an economic slowdown, the biggest beneficiary tends to be the US dollar. This is because the market perceives the dollar, due to its reserve currency status, as a safe currency to hold excess funds.
As all commodities, including gold, are priced in dollars, they tend to face selling pressure whenever the dollar strengthens. This was a big reason for the pressure on the gold price.
However, now that it seems that the war is over, investors will be closely tracking the dollar for cues about gold.
#3 Interest rate outlook
Implicit in the rise of commodity prices back in 2025, gold in particular, was the assumption that inflation would stay above normal in the foreseeable future.
The thinking behind this was that central banks around the world would lower interest rates steadily which in turn would keep consumption strong.
Thus, as long as the developed economies avoided a recession, inflation would not fall to low levels. Gold does well during rising inflation or high inflation expectations.
However, that situation changed due to the surge in crude oil prices. The outlook for inflation has spiked which is something central banks cannot ignore. This means that the possibility of interest rate hikes is has increased.
Higher interest rates attract funds away from assets that don’t pay interest like gold. This has contributed to the decline in the price.
It remains to be seen if a fall in crude oil prices due to the reopening of the Strait of Hormuz after the war will change the interest rate outlook.
If crude oil prices fall quickly, central banks may not hike interest rates. This will be positive for gold.
2026 gold outlook
There are many variables at play here that can be summed up in the following questions:
- Is the war in West Asia really over?
- What is the situation in the Strait of Hormuz in terms of regular and safe passage of crude oil and natural gas?
- When will the refineries and oil & gas wells return to full production?
- Is there a likelihood of a resumption in hostilities in this region?
- What is the negative impact of the disruption in the energy trade already caused by the war?
- How quickly and by how much will inflation, caused by high fuel prices, come down?
- Will central banks put aside inflation concerns due to falling crude oil prices and consider interest rate cuts? Or will they hike rates to bring inflation under control.
- How much will economic growth slow down and how quickly will it recover?
- Will central banks continue to buy gold in large amounts as they have been doing recently?
The answers to these questions will decide the fate of gold in 2026 and beyond.
Conclusion
At Equitymaster, we believe in having 5-10% of one's portfolio in gold at all times.
However, investors should not see gold as a potential substitute for any other asset.
It makes sense to hold some precious metals in one's long-term portfolio, but it does not make sense to speculate on short term price movements.
While considering an investment in gold, have a time horizon well beyond 2026.
Just because the war has ended, it doesn't automatically make gold either a buy or sell.
Do your due diligence.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com