Introduction

Since the commencement of the West Asia conflict, gold has declined by 25.73% - a move that has surprised many seasoned market participants and challenged some of the most widely held assumptions about the precious metal.

Figure 1 tells a revealing story.

Although gold attempted several recoveries during this decline, sellers used each recovery as an opportunity to re-establish short positions, resulting in a sequence of lower highs and lower lows that reinforced the prevailing trend.

Particular attention must be paid to the 4,100$ per ounce level.

On previous two occasions - 23 March’26 and 11 June’26 - gold bears attempted to push prices below 4,100$ per ounce. In both instances, buyers emerged, successfully defending the level and triggering meaningful recoveries. With downside momentum building once again, the critical question is whether this support zone can withstand a third test.

Before attempting to answer that question, it is necessary to examine a more fundamental issue: gold’s character appears to have changed. The traditional frameworks that governed gold’s behaviour in the past are no longer operating in the same manner. Any assessment of gold’s future direction must therefore begin with an understanding of how its underlying drivers have evolved.

The Personality of Gold

Traditionally, gold has been viewed as a hedge against inflation and as a safe haven asset that attracts capital during periods of geo political uncertainty and conflict. If these relationships were consistently dominant, one would have expected gold to remain resilient during the West Asia conflict. Instead, gold has experienced a significant decline, suggesting that other forces are currently exerting a stronger influence on price discovery.

To better understand the current character of gold, it is necessary to revisit the rally that carried the prices from approximately 3,500$ per ounce in April’2025 to nearly 5,600$ per ounce in January’2026 – a remarkable appreciation of around 60% in just nine months.

What triggered this rally?

One of the most significant developments in the post Russia-Ukraine war environment was the freezing of Russian assets by the US administration. This event altered the way many sovereign institutions viewed reserve management. The possibility that foreign exchange reserves and investments in dollar denominated assets could be subject to geo-political considerations encouraged central banks to re-assess the composition of their reserve portfolios.

Gold emerged as a natural beneficiary of this re-assessment. The de-dollarization theme became a powerful structural driver of capital flows into the precious metal and laid the foundation for the rally that followed.

Real Yields and Gold: The Dominant Constraint on Price

Observe the above figure. The upper panel shows the daily chart of gold, while the lower panel plots 10-year real yields. The correlation between the two series clearly illustrates the inverse relationship between gold and real yields.

This brings us to another important character attribute of gold: its non-yielding nature.

Unlike bonds, gold does not pay interest. Unlike equities, gold does not distribute dividends. Consequently, the attractiveness of holding gold is inherently relative – it depends on the level of return available in alternative, yield bearing assets.

In this context, real yields serve as a critical benchmark. When real yields rise, the opportunity cost of holding a non-yielding asset such as gold increases. Capital is therefore incentivised to shift towards interest bearing instruments, creating persistent headwinds for gold prices. Conversely, when the real yields decline, the relative attractiveness of gold improves, supporting its role as a store of value.

What Next for Gold?

We now move towards a forward-looking assessment of gold.

On the supportive side, central bank accumulation continues to provide a structural tailwind. Evidence from the World Gold Council’s ‘Central Bank Gold Reserve Survey’ conducted between 5 February and 19 May reinforces this supportive narrative.

• 89% of respondents expect global central bank gold reserves to increase over the next 12 months.
• 45% of respondents expect their own institution’s gold holdings to rise over the same period.
• 74% of respondents anticipate moderate or significantly lower US dollar allocations within global reserve portfolios over the next five years.

These responses underscore a continued shift in reserve management strategies, with gold increasingly viewed as a strategic diversification asset rather than a tactical allocation. This provides a structural underpinning to prices and suggests that official sector demand is likely to remain resilient around key support level of 4,100$ per ounce in the near term.

Offsetting these supportive factors is the persistent headwind from elevated real yields, which continues to constrain the upside potential by increasing the opportunity cost of holding a non-yielding asset such as gold. With inflation expectations and real yields trending higher, gold has, for the first time since October 2023, moved below its 200-day moving average. The 200-day moving average, currently placed at 4,366$ is expected to act as a strong dynamic resistance zone in the near term.

An additional layer of pressure arises from developments in the US dollar framework. In “What Next for the US Dollar Index” published on HedgesPro on 21 June, it was argued that the DXY has the potential to move from 100.82 towards 101.948 in the first instance. A sustained break above this level would open the way for further advance towards the 104 zone, reflecting a broader strengthening in the dollar’s trend structure.

This outlook is relevant in the context of gold, particularly given the observation of ongoing ETF outflows, pointing towards a weakening short-term investor participation.

Against this backdrop, a break below 4,100$ cannot be ruled out in the near term. The next key structural support lies at 3,886$, corresponding to a prior prominent swing low. In the event of a deeper corrective phase, this level is likely to attract demand from market participants.

Scenario Summary: Gold Outlook

Gold Risk Management and Hedging Framework for Indian Market Participants

For its Indian clients, Rainflo Consulting LLP will be publishing a detailed strategy note on navigating gold price risk in the current macro environment. This will be particularly relevant for Indian industry participants, given the prevailing import duty structure in India, and fluctuations in the Indian Rupee (INR).

The presence of deep and highly liquid MCX futures and options contracts provides Indian participants with effective tools for managing price risk and hedging inventory exposures.

In the current dynamic environment, disciplined risk management – rather than directional conviction – remains the most effective framework for navigating gold markets.