Gold prices have underperformed expectations despite escalating tensions in West Asia, challenging their traditional safe-haven narrative. After briefly surging above $5,300, the metal corrected sharply by around 11–12%, slipping to near one-month lows of $4,500 even as geopolitical risks intensified.

The decline has been driven by a stronger US dollar, persistent inflation concerns, and growing market expectations that the Federal Reserve may keep interest rates higher for longer—factors that have offset safe-haven demand. This comes after gold delivered nearly 50% returns in 2025, leading to profit booking and position unwinding.

Despite the volatility, gold continues to be supported by structural drivers such as central bank buying and long-term inflation hedging demand. However, according to Devang Shah, Head – Fixed Income at Axis Mutual Fund, the near-term trajectory remains complex, with multiple macro variables shaping price action.

“Gold and silver move in cycles. Traditionally, when you see geopolitical uncertainty or inflation rising, investors tend to buy gold,” Shah said, highlighting the metal’s historical role as a hedge.

Why gold hasn’t surged

Interestingly, Shah points out that gold has not rallied as sharply in the current geopolitical environment as it typically would. He attributes this to a combination of factors.

“One, the asset class has already done significantly well last year, so there has been some profit booking. Second, there were over-leveraged positions that have now been unwound,” he explained.

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Another critical factor has been shifting expectations around inflation and interest rates. Markets are increasingly concerned that persistent inflation could lead to tighter monetary policy.

“When financial conditions get tighter, gold tends to underperform because liquidity reduces and expectations of rate hikes increase,” Shah noted.

Additionally, a temporary strengthening of the US dollar during periods of geopolitical stress has also weighed on gold prices, limiting immediate upside.

Central banks and structural demand

Despite short-term headwinds, Shah acknowledges that structural drivers remain intact. Central bank buying has emerged as a significant long-term support for gold.

“Earlier, central bank buying was limited, but now they are continuously increasing gold holdings to diversify away from the dollar,” he said.

This shift, combined with strong investment demand — particularly from Asian markets seeking inflation hedges — has helped gold maintain elevated price levels even during phases of consolidation.

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The turning point

The outlook for gold, according to Shah, will largely depend on how inflation and monetary policy evolve in the coming months.

“If inflation remains high and forces central banks, especially the Fed, to tighten policy further, that could be negative for gold in the short term,” he said.

However, he expects this dynamic to change once macro conditions stabilise.

“The moment this geopolitical flare-up settles, financial conditions may not remain as tight. That could support gold again,” Shah added.

He also highlighted that current dollar strength may not sustain over the long term, especially if structural factors such as fiscal deficits and inflation trends remain unresolved.

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Medium-term outlook

Shah believes gold could remain range-bound in the near term, given the interplay of geopolitical tensions, inflation risks, and monetary policy uncertainty.

“Till the escalation continues, precious metals may remain range-bound. But over the next 6 to 12 months, we expect decent returns as macro conditions normalise,” he said.

Broader market estimates remain supportive, with global investment banks projecting gold prices to stay elevated and potentially move higher if monetary easing resumes.

Conclusion

While gold’s long-term fundamentals remain intact — driven by central bank demand, inflation hedging, and geopolitical uncertainty — its near-term performance is likely to be shaped by liquidity conditions and interest rate expectations.

As Shah’s analysis suggests, investors may need to brace for short-term volatility, even as the broader outlook for gold remains structurally positive.