Gold's recent underperformance should prove to be temporary, with the yellow metal expected to hit $5,000 per troy ounce by the end of the year, ING Bank said in a note Monday.
Gold has fallen about 12% since the Iran war began on Feb. 28, ING said. Bullion futures were last trading little changed at $4,732 per ounce on Monday.
Gold is widely perceived as a safe haven that tends to shine in a financial crisis or growth shock. Hence, the yellow metal's recent decline may have come across as "a counterintuitive move," ING Commodities Strategist Ewa Manthey said in a note.
But the sell-off reflects macro consequences of the Middle East conflict, rather than "a breakdown in gold's safe-haven role," Manthey said.
ING remains constructive on gold, anticipating a rebound in bullion prices to $5,000 by year-end.
"Gold's safe-haven role is not in question," Manthey said. "Recent months have shown that short-term price action can still be dominated by macro forces -- particularly real yields, the dollar and expectations for (Federal Reserve) policy. Once those headwinds begin to ease, gold's underlying support should reassert itself."
Gold prices generally have a positive correlation with inflation and an inverse relationship with interest rates and the dollar index.
Inflation has re-accelerated in the aftermath of the US-Israel war with Iran that has disrupted shipments through the Strait of Hormuz and sent energy prices higher. These dynamics have weakened the case for near-term monetary policy easing, Manthey said.
"Higher oil prices push inflation up, keep (central bank demand) on hold and strengthen the dollar, all of which weigh on gold," she said. "High liquidity also makes it a source of funds when investors need to cover losses elsewhere."
The Fed left its policy rate unchanged in April, saying the Middle East conflict was fueling uncertainty around the US economic outlook.
"Our US economist still expects easing in the second half of the year, but a prolonged energy shock could push that back," Manthey wrote. "Real yields and the dollar remain the key constraints on gold."
President Donald Trump on Sunday rejected Iran's counter offer to end the war, dimming prospects of an imminent deal between the two sides.
"The setback keeps the (US-Iran) ceasefire timeline uncertain and inflation risks elevated -- reinforcing the higher-for-longer rate narrative that has weighed on gold throughout the conflict," Manthey said. "A durable resolution remains the key catalyst for a sustained gold recovery."
