Gold’s demand drivers 'should once again reassert themselves’ after Iran war shock fades – Merrill’s Avioli

Merrill strategist Emily Avioli says gold’s recent slump is being driven by positioning, higher real yields and a stronger dollar rather than any deterioration in the metal’s long-term fundamentals. She argues the selloff is a digestion phase after a powerful run, noting gold has risen sharply since 2022, moved above $5,400/oz in January, and then fell about 16% after the Middle East conflict began as investors sold bullion for liquidity. Avioli highlighted that rising energy prices have pushed inflation and rate-cut expectations higher, with fed funds futures now leaving open the possibility of a Fed hike. That has lifted real yields and increased the opportunity cost of holding non-yielding assets like gold. She also said the dollar has strengthened on safe-haven demand, reinforcing the near-term headwinds for bullion. Despite the pullback, Merrill remains constructive on the structural backdrop: large fiscal deficits, eventual dollar moderation and continued central bank reserve diversification should keep strategic demand intact. The desk takeaway is that geopolitical shocks may no longer be enough to sustain gold on their own, but once the Middle East premium fades, macro and official-sector buying could reassert themselves and re-establish the uptrend.