- Protracted US-Iran conflict is keeping oil prices higher for longer
- Higher energy prices have revived inflation concerns, lifting yields and weighing on gold
- Gold's sensitivity to rising real yields has halved since 2022
- Overall stance remains constructive; recalibrate quarterly prices lower on rising yields
Related Insights
US-Iran disruption is looking increasingly structural. The probability of a protracted US-Iran conflict has increased substantially. The MOU between the two countries broke down in July, and tensions re-escalated in August and September. Consequently, traffic through the Strait of Hormuz (SOH) has once again ground to a halt. Since then, any attempt at diplomacy has proven ineffective. In particular, the US and Iran seem to have reached an impasse on matters pertaining to nuclear weapons. Energy markets have, in turn, shifted to reflect these developments: Brent has rebounded from its July lows and is now hovering around the USD100/bbl mark. The region is actively re-routing some of its energy exports via the Gulf of Oman and Bab el-Mandeb, but aggregate volumes remain below pre-war levels while costs of shipping (including transport fees, insurance, and ship-to-ship transfers) continue to stay markedly elevated. As such, while these re-routing measures may help to partially alleviate the Hormuz disruption, we believe higher-for-longer energy prices are still firmly in play.
What does this mean for rates? The consequence of higher-for-longer energy prices is, obviously, that inflation risk is once again skewed to the upside, which has led markets to price in more rate hikes. Market consensus on US Fed policy has swung wildly this year. Expectations were broadly for the Fed to continue cutting rates at the start of the year, but the advent of the US-Iran conflict (and its subsequent re-escalations) turned them decisively more hawkish. Consequently, the Fed raised policy rates by 25 bps for the first time in over three years at its September FOMC meeting. As of 6 Oct, markets are pricing another hike by December this year (after the milestone September hike) and an over 40% chance of one more in January next year. As a result of this shift in the rates outlook, government bond yields have moved sharply higher. The 10-year US treasury yield, for example, has risen past the 5.3% handle, the highest level in 24 years. Accordingly, gold fell from its late August peak of USD4,657/oz. to USD4,128/oz. as of 6 Oct.
The silver lining in rising yields. There is no denying that the current rate environment is weighing on gold's short-term outlook. However, the impact of rising yields may be less than many anticipate. We analysed monthly gold returns in relation to changes in US real rates (as proxied by the yield on the inflation-index US 10-year government bond) and found that between Jan 2003 and Feb 2022, a one percentage point increase in real rates corresponded with an 11.2% decrease in monthly gold returns. However, from Mar 2022 to Dec 2025, a one percentage point increase in real rates caused only a 5.6% decrease in monthly gold returns. In other words, gold returns are today half as sensitive to increases in real rates as they were before the advent of the Russia-Ukraine war.
Why is gold more resilient today? The reason is twofold. Firstly, the freezing of Russia's foreign exchange reserves by Western governments in 2022 intensified the central bank impetus for reserve diversification; this favoured gold significantly, as the latter does not carry counter-party risk. Annual central bank buying exceeded the 1,000 tonnes in the three years following the Russia-Ukraine war, more than double the historical average of the prior decade. Secondly, systemic deficit spending and growing sovereign debt worldwide have slowly but surely chipped away at confidence in the global financial system. Against such a backdrop, gold with its anti-fiat properties has become increasingly prominent as 'insurance' for investor portfolios. These tailwinds continue to reinforce the long-term investment narrative for gold. This, in turn, helps to partially offset the impact of rising yields.
Inflation is under control (for now). In addition to gold's growing resilience to rising yields, gold investors can also take some solace in the fact that inflation in the US has remained under control for now. Both CPI and PCE inflation in the US came in flat in August despite the steady increase in energy prices in July and August. On a y/y basis, the headline readings for both gauges remained at +3.4%, unchanged from the previous month. Core inflation readings were similar, staying flat or falling marginally from July to August. Assuming the US-Iran conflict does not deteriorate further, we continue to hold the view that inflation will remain under control in the US, and any hikes by the Fed will constitute minor policy adjustments rather than a full-blown hiking cycle. For more details on why we think policy rates have limited headroom, refer to our report "Credit Strategy: 10Y UST at 5%. What Next?" (published 16 Sep 2025).
Target price recalibration. In light of persistent geopolitical conflict in the Middle East and higher-for-longer energy prices, our 10-year US Treasury yield estimates have increased from 4.5-4.65 to 5.1-5.2 over the next 12 months. We have also moderated our estimates for quarterly investment demand to 350 tonnes from 600 tonnes, following the substantial surge in ETF inflows in the third quarter. Accordingly, our target prices for gold have been revised downwards for the next four quarters: 4Q26: USD4,800/oz. | 1Q27: USD5,000/oz. | 2Q27: USD5,300/oz. | 3Q27: USD5,600/oz. We continue to be overweight gold on both a 3-month and 12-month basis but acknowledge that near-term upside will likely be lower than we had originally anticipated, given the protracted nature of the US-Iran conflict.
Investor implications. Notwithstanding this adjustment to our target price, we remain firmly convicted on gold’s longer-term upside, as its role as a portfolio hedge will only become increasingly relevant in the face of growing geopolitical fragmentation and debt sustainability concerns. For investors who do not have existing holdings, current levels make for an attractive entry point. For investors who already have allocations to the precious metal, we advocate holding on to these positions and rebalancing as needed according to individual risk appetite and investment objectives.
Figure 1: Rising rates continue to keep a lid on gold prices
Source: Bloomberg, DBS
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