Do Retreating Precious Metals Prices Offer a Buying Opportunity

Figure 1: Precious metals prices have fallen sharply since the war broke out

Several factors drove precious metals prices higher from early 2025 through late January 2026 that can be boiled down to one basic fundamental: fear of inflation. The factors that fed inflation concerns include:

1. Above-target core inflation: Inflation, excluding the volatile food and energy inputs, was running above central-bank targets in most major economies even before the war broke out (Figure 2).

Figure 2: Core inflation was above target even before the conflict began

1. Easier monetary policy: Despite generally above-target core inflation, nearly every major central bank was cutting interest rates (Figure 3).

Figure 3: Central banks cut rates despite above-target core inflation

1. Large budget deficits: Many countries were running unusually large budget deficits as a percentage of GDP including Brazil (8.5%), China (8.5%), France (5.5%), Mexico (4%), U.K. (4.5%) and U.S. (5.5%) while others like Germany and Japan were getting ready to significantly ramp up government investment in infrastructure and military spending, thereby growing their deficits.
2. Concerns about central bank independence: Amid the above-target inflation, easing monetary policy and large budget deficits, investors grew concerned that central banks could be asked to fund the deficits with easy money policies.
3. Geopolitical uncertainty: Rising trade barriers, onshoring and near-shoring of supply chains as well as the potential for conflicts in the Middle East and the Pacific combined with the ongoing Russo-Ukraine war contributed to a desire to diversify into precious metals.

But this dynamic began changing in January with the nomination of Kevin Warsh to lead the U.S. Federal Reserve (Fed) in mid-May. Markets saw him as somebody who was likely to strike an independent stance on monetary policy and a long-time opponent, or at least a skeptic, of quantitative easing, a central bank policy of buying government bonds and financial assets to inject liquidity into the economy. With the idea of the Fed losing independence fading, precious metals prices fell sharply. By late February, however, precious metals prices were on their way back up before the Mideast conflict broke out.

The conflict has proven to be bad news for gold, especially for palladium, platinum and silver. In some ways this may appear to be paradoxical. Consumer prices for gasoline and diesel fuels have jumped sharply. According to data from the American Automobile Association (AAA), Americans are now paying nearly $1 per gallon more for gasoline and $1.50 more for diesel (and heating oil) than they were in February. Given that gasoline and other fuels account for up to about 3% of the consumer price index (CPI), this could push headline U.S. inflation as much as one percent higher over the next couple of months if prices of these fuels stabilize at their current levels (Figure 4). And, the rise in prices could be even more pronounced in the rest of the world, where crude benchmarks like NYMEX's Brent Last Day Financial Futures are trading $15 higher than West Texas Intermediate (WTI) crude oil while GME Oman crude is over $60 higher than WTI. This suggests a potentially bigger energy inflation shock across Europe and Asia than in the U.S.

Figure 4: Gasoline and diesel prices have risen sharply

Buy the Rumour, Sell the Fact

Now that higher inflation, at least in the very near term, is crystallizing, it isn't good news for precious metals for a simple reason: central banks are beginning to reverse course and consider rate hikes. In the U.K., the Bank of England suggested that it might hike rates as many as three times. The European Central Bank has also warned of potentially higher rates. While the Fed suggested after its March meeting that it still penciled in one 25-basis point rate cut for 2026, Fed funds futures have largely de-priced any further Fed rate cuts for 2026 and 2027 (Figure 5). The prospects for fewer rate cuts, or even rate hikes, make holding fiat currency relatively more attractive compared to precious metals than it seemed when investors still priced deeper rate cuts.

Figure 5: Investors have de-priced expectations for Fed rate cuts

In some ways the 2025-2026 behavior of precious metals is reminiscent of the period from 2019-2023. From early 2019 to mid-2020, gold prices soared as markets de-priced expected Fed rate hikes and the central bank eventually put rates at zero at the beginning of the pandemic. Then, from 2021 through 2023 when inflation rose, gold prices fell from $2,100 back to $1,600 as a result of central banks having to undertake the biggest tightening of interest rate policy since the late 1970s (Figure 6). It was a classic case of "buy the rumor, sell the fact." Gold and silver accurately anticipated higher inflation to come in 2019 and 2020 but when it actually arrived, inflation proved to be bad news, at least in the short-term, because precious metals are usually negatively sensitive to rate expectations (Figure 7).

Figure 6: Gold rallied in 2019 and 2020 until markets began fearing Fed hikes

Figure 7: Precious metals are usually negatively sensitive to rate expectations

The Role of the Dollar

The U.S, dollar (USD) mostly fell from late 2024 to early 2026. This probably also strengthened gold and the other precious metals which correlate negatively with the daily changes in the Bloomberg Dollar Index (Figure 8). Since the Mideast conflict broke out, however, USD has proven to be a flight-to-quality instrument and has rallied versus most other currencies to the detriment of precious metals (Figure 9). This coincides with a general de-risking of portfolios that has led to a minor decline (so far) in equity prices, crypto assets and other risk-on assets.

Figure 8: Precious metals are often negatively correlated to USD

Figure 9: USD rebounded vs. other currencies after the conflict began

Outlook

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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.