Gold's volatility: is now the time to invest?

The glitter of gold has caught the eye of investors once again, but a closer look reveals a landscape riddled with potential pitfalls. While gold prices remain elevated, a confluence of geopolitical tensions, inflationary pressures, and shifting central bank policies is creating a precarious environment for the precious metal.

Geopolitical storms and the oil price seesaw

The current conflict in Iran is acting as a significant wild card. As Thomas Winmill, portfolio manager at Midas Funds, observes, “As the oil price rises and falls on Middle East war developments, gold’s price will swing.” This isn’t a simple case of geopolitical uncertainty driving investment towards safe havens; the direct impact on oil prices creates a complex feedback loop, directly affecting the budgets of everyday investors. Brett Elliott, director of content at APMEX, succinctly puts it: “We cannot ignore how war, oil prices, interest rates, and gold prices are all interlinked.” A sudden surge in oil could trigger inflationary pressures, complicating the picture further.

The inflationary threat & the fed's response

Inflation remains a critical factor. Though currently at a relatively low 2.4%, the specter of rising prices looms large, particularly if the conflict in Iran escalates. Chris Berkel, investment advisor and president of AXIS Financial, warns of a “tail-risk event” – a potential Federal Reserve rate hike. The logic is straightforward: rising inflation pressures the Fed to raise interest rates, a move historically detrimental to gold prices. A strengthening dollar, potentially a consequence of the Iranian situation, would exacerbate this effect.

Central banks: from buyers to potential sellers

For years, central bank buying has been a cornerstone of gold's upward trajectory. Jim Wiederhold, commodity indices product manager at Bloomberg Indices, highlights this, noting that “From 2022 through 2024, central banks around the world bought over 1000 tons annually, and the price of gold nearly tripled.” But the script is changing. Faced with volatile prices and rising expenses, some central banks are drastically curtailing their gold purchases, and, in some instances, even selling off reserves. As Elliott cautions, “Central banks monetizing or selling their gold holdings could suppress prices.”

Navigating the risks: a long-term perspective

The bottom line? Gold remains a volatile asset, susceptible to rapid price swings—potentially 10% to 20% in either direction, according to Winmill. It’s not a get-rich-quick scheme; it’s a long-term strategic play. Rather than chasing daily price fluctuations, investors should focus on incorporating gold into a diversified portfolio, understanding its role as an inflation hedge and a safe haven during times of extreme uncertainty. The current climate demands cautious optimism and a keen awareness of the risks at hand.