Gold drops 13% in March, but experts see no risk to safe-haven status

Gold prices were headed for their worst month in more than 17 years, but experts at Commerzbank AG believe that the precious metal status as a safe-haven asset is not at risk. 

On Tuesday, gold prices saw an increase, driven by optimism for a reduction in the conflict in the Middle East.

Also, a weaker dollar made commodities priced in the currency less expensive for people holding other forms of money.

According to a Monday report in the Wall Street Journal, Trump informed his aides that he would be prepared to halt the military operation against Iran, even if the Strait of Hormuz largely remained shut.

He would postpone the complicated task of reopening the Strait for a future time.

The COMEX gold contract was last at $4,583.97 per ounce, up 0.6%, while silver was at $71.920 an ounce, up 1.9% from the previous close. 

Gold heads for worst month

Bullion prices have seen a sharp decline this month, falling over 13%. This puts gold on track for its biggest monthly drop since October 2008. 

The decline is mainly attributed to the stronger dollar and decreasing prospects for a US interest rate cut this year.

Despite this recent slump, prices remain up by approximately 5% for the current quarter.

Higher energy prices, which could exacerbate broader inflation, have led traders to almost entirely dismiss the possibility of a US Federal Reserve rate cut this year.

Gold, being a non-yielding asset, typically performs well when interest rates are low.

Prior to the outbreak of the war in the Middle East, the CME Group's FedWatch tool indicated market expectations for two Federal Reserve rate cuts this year.

Looking ahead, Goldman Sachs maintains its expectation for gold to reach $5,400 per ounce by the end of 2026, driven by ongoing central bank diversification and anticipated Fed easing.

New forecasts

Despite recent developments, Commerzbank has adjusted its gold price forecast upward, which may be unexpected. 

The German bank has raised its price forecast from $4,900 to $5,000 per troy ounce for the end of this year, and from $4,800 to $5,200 per troy ounce for the end of next year.

“We therefore clearly do not believe that the recent, quite significant pullback is sustainable,” Thu Lan Nguyen, head of FX and commodity research at Commerzbank said in a report. 

For one thing, in our base case scenario, we assume that the war in Iran will end in the spring. This is likely to lead to a correction in the recently quite extreme expectations for interest rate hikes in the US.

The bank also anticipates that the US Federal Reserve will restart its rate-cutting cycle late this year, ultimately reducing its benchmark rate by 75 basis points by mid-next year.

Over the longer term, US real interest rates are expected to decline. This is because US inflation is anticipated to remain above the target level in the coming year.

Consequently, the reduced opportunity cost of holding gold is likely to increase its appeal, Nguyen said.

Additionally, Commerzbank maintains a bullish outlook for silver, despite its recent struggles mirroring gold's performance.

The German bank projects a rise in silver prices to $90 by the end of the current year, further climbing to $95 by the conclusion of 2027.

No risk to safe-haven status

Commerzbank still views gold as a safe haven, but the nature of the crisis matters. 

Gold prices rise during crises dominated by economic risks such as the Great Financial Crisis and COVID-19, as central banks are expected to respond with expansionary monetary policy, specifically interest rate cuts.

However, in the current crisis, the prevailing focus is on the inflation shock, leading most to anticipate increases in interest rates.

The Swiss franc, typically a safe haven, has recently underperformed other G10 currencies.

This is because the Swiss National Bank has been less aggressive with interest rate hikes in response to inflation shocks than other central banks, partly due to Switzerland's historically lower inflation, Nguyen explained. 

It is therefore to be expected that the interest rate differential, similar to the situation with gold, will develop to the detriment of the franc

Despite this, gold is currently not serving its crucial role as a typical safe haven asset: it is failing to counteract losses, especially those seen in the stock market.

“However, this is primarily due to the nature of the crisis and is not specific to gold; it also applies to other typical safe havens,” Nguyen added.