BofA: Gold faces uphill battle above $4,000 as Iran conflict fuels oil-driven inflation

The Iran conflict is putting pressure on gold through the oil route: rising crude prices stoke inflation worries, keep the Federal Reserve on its tightening track and buoy the dollar — all factors that weigh on a metal that offers no yield. Oil thus becomes the crucial element to monitor for gold, with any reduction in Middle East supply concerns likely to benefit the metal more than a further escalation would. Given soft physical buying and the potential for ETF holders to sell if prices slip, the downside risk could intensify if the $4,000 level fails to hold. This week's US CPI and PPI data, plus remarks from Fed Chair Warsh, serve as the immediate tests, and hotter-than-expected figures would likely heighten pressure on bullion.

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Yesterday:

• Gold edges up in Asia on the energy truce narrative, that looks like a VERY shaky support
• Gold futures swing trade idea: Four buy entries and four upside targets
• Chart of the day: Gold price eyes $4,200 breakout, but buyers still face two major hurdles
• Gold rebounds on easing geopolitical tensions and stalls: eyes on US CPI as the next key catalyst

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BofA still holds to its long-term bullish view on gold, but for now the Iran war is acting against the metal, not in its favor, by keeping oil, inflation and the Fed all aligned in the wrong direction.

Summary:

• Bank of America projects gold to average $4,000 an ounce in the fourth quarter and sees prices not sustained above that level over the next three months
• The bank forecasts an average of roughly $4,800 in 2027, preserving its long-term optimistic outlook
• BofA notes physical demand remains weak, and its tracker indicates combined gold buying by central banks, China and India lower than a year earlier
• ETF inflows have been positive for two months, but the bank cautions that falling prices could cause liquidation and amplify selling pressure
• BofA suggests central banks might resume gold sales as the Middle East conflict intensifies
• A bottom likely requires easing inflation and Iran war concerns, a halt to dollar appreciation and an end to Fed tightening, according to the bank

Bank of America expresses caution on gold in the short term, arguing that weak physical demand and inflation pressures related to the Iran war are likely to prevent prices from maintaining above $4,000 an ounce in the coming three months.

In a precious metals report issued on Monday, BofA's commodity analysts stated they expect gold to average $4,000 an ounce in the fourth quarter before climbing to an average near $4,800 in 2027. The bank indicated that near-term obstacles will persist until risks from higher oil prices linked to the Iran conflict subside.

Investment demand has proven more resilient than physical buying. Gold-backed exchange-traded funds have recorded positive inflows for the past two months despite ongoing inflation, elevated bond yields and a firmer US dollar. BofA warned, though, that ETF inflows alone cannot sustain the market and could turn negative, since a further drop in prices might lead investors to liquidate holdings and exacerbate selling.

The bank's tracker showed combined gold purchases by central banks, China and India remaining below year-ago levels. BofA noted that physical markets stay soft, pointing to feedback from last week's London Bullion Market Association conference. It also cautioned that central banks might restart selling as the Middle East conflict escalates anew. Official holdings have declined somewhat, which the bank said was unsurprising, as roughly 90% of the recent rise in their value came from price gains rather than fresh acquisitions.

BofA said gold is likely to find a bottom only after inflation and Iran war worries ease, the dollar stops strengthening and the Federal Reserve concludes its tightening cycle. A dovish shift by the Fed would serve as the most significant catalyst for a recovery, though renewed concerns about currency debasement could also rekindle bullish momentum.

Gold fell on Monday after touching a one-week high, weighed down by a stronger dollar and higher oil prices. One analyst remarked that this combination reinforced worries that persistent energy-led inflation could keep the Fed on a hawkish course.

Markets will look to this week's US consumer price index on Wednesday and producer price index on Thursday, along with comments from Fed Chair Warsh, for signals on interest rates. Hotter inflation data would bolster BofA's view that gold's next upward move must wait until the Fed indicates it has finished tightening.