If tensions with Iran ease, gold will rise due to leverage and yields

Gold is falling into bearish territory due to leverage and government bond yields, but has the potential to bounce back sharply once the Iran war subsides.

The analysis from the CEO of one of the world’s largest independent financial advisory organizations comes as bullion faces a sharp selloff, with prices falling more than 20% from highs above $5,500 in late January, and recording one of the sharpest weekly declines in more than a decade.

Nigel Green of Deavere Group says: “A significant part of this decline is probably driven by leverage.

“Investors who had built up large positions using borrowed capital are now being forced to relax as volatility increases, and this has accelerated the pace of the decline.”

He continues: “Margin calls are prompting traders to liquidate gold positions to raise cash. Gold has been an exceptional performer, so it becomes an obvious source of liquidity when markets become more turbulent.”

Recent movements in the currency and bond markets are adding pressure.

The US dollar index has strengthened in recent sessions, while benchmark yields in both the US and UK have moved higher, pushing up the opportunity cost of holding non-yielding assets.

The chief executive of Deavere comments: “Rising yields in the US and UK are an important factor. Investors can now secure more attractive returns from government bonds, which reduces the relative appeal of holding gold, especially in the short term.

“A strong dollar exacerbates the problem. Gold is priced in dollars, so a strong dollar makes it more expensive for international buyers and reduces demand.”

Ten-year US Treasury yields have risen again, hovering around the mid-4% range, while UK gilt yields remain high after consistent inflation data.

Market expectations of an aggressive rate cut have diminished, putting pressure on yields.

Nigel Green explains, “Markets are reassessing the pace of monetary easing. Sticky inflation keeps yields higher for longer periods of time, and gold reacts quickly to that change because it provides no income.”

Regardless of the scale of the pullback, he argues that the current move reflects the situation rather than a decline in underlying demand.

“Gold’s rally over the past year has been underpinned by structural forces, including sovereign accumulation, geopolitical risks and fiscal concerns. Those drivers have not disappeared.”

Central banks have been playing a major role. Global official sector purchases have exceeded 1,000 tonnes annually for several years in a row, with emerging market institutions, such as the People’s Bank of China, leading the trend as part of a broader diversification away from the dollar.

Nigel Green says: “Central banks are still accumulating at a historically strong pace. This is a strategic, long-term allocation designed to strengthen reserves and reduce the risk of currency volatility.”

He continues: “Demand from sovereign buyers creates a powerful floor beneath the market. This limits downside and sets the stage for a sharp rebound once short-term pressures ease.”

Geopolitics remains the main catalyst for the next major move. Gold initially jumped on safe-haven demand amid tensions over Iran, but reversed course as the market turned to cash preservation and yield opportunities.

Nigel Green says: “This pattern is familiar. In the early stages of a crisis, gold attracts inflows. As the situation develops, investors often step back to manage liquidity and risk exposure.”

Any credible sign of easing tensions in Iran would “rapidly change the dynamics”, with capital that has been sidelined or redirected rapidly moving back into gold.

He concluded: “It is a leverage-driven washout that is hitting higher yields.

“Forced sales are weighing heavily on the market, but this is temporary.

“We expect the change in sentiment around Iran to lead to a bullish rebound and gold to move higher with real strength.”