(Kitco News) – While the Iran conflict has rocked the commodity sector, with oil prices spiking as gold prices have slid lower, demand for the yellow metal has remained strong and it has performed exactly as it should under the circumstances, according to James Steel, Chief Precious Metals Analyst at HSBC.
“The demand has been good out of China,” Steel said. “The Shanghai Gold Exchange premium – the difference between the domestic price in China and the global price – is around $20, indicating strong domestic demand in China, which is mostly on the institutional side. It's interesting; it's less on jewelry and coins and small bars, which we have seen traditionally, and more on the large bars, more for institutions, because we had some regulatory reform in both China and India. Now the top insurance companies in China are allowed to accumulate bullion, and asset managers in India are allowed to accumulate it as well.”
“But in addition to that, we saw surprisingly strong buying in the latest data from the central bank, from the People's Bank of China, who bought 8.1 tonnes for the last month's data.”
Steel was asked what he learned from gold’s peak around $5,400 per ounce in late January, and its subsequent decline amid the Middle East conflict.
“Well, I think the run up was a little robust,” he said. “We were bringing in a lot of money that had not been in the market for quite some time, or had not traded gold at all. One could argue that the market had become overly long, particularly when you look at CFTC data and other things we have available now.”
“There's been a lot of critics of the bullion market saying that the decline since the strikes on Iran and escalating oil prices, [claiming] that gold is not a safe haven, that it’s failed in some sense,” Steel said. “I would argue exactly the opposite, because as the oil went up and we got restoked inflationary fears, and bond yields rose, and the dollar rose, equities declined. In that atmosphere, ready cash was needed. And that's what gold provides you.”
“We did see liquidation in the gold market, but mostly as a reaction to the financial market,” he added. “In a sense, gold was an insurance policy, and that insurance policy was being cashed in.”
Steel was also questioned on his views of gold’s historical relationship with oil prices.
“Well, that's interesting, because I'm old enough to remember when it was a positive relationship,” he replied. “We've done some work on this. In the 1970s, gold was positively correlated with oil: Oil ran up, and so did gold. In the 1980s, that was the same; oil fell and gold also fell.”
“Now, that correlation seemed to break apart as we got into the 90s, as oil was a less significant part of the global economy,” he said. “That correlation is now only about 0.15, or even negative at times… It's negative at the moment.”
Finally, Steel was asked whether he views gold as one of several alternative assets within investor portfolios, or whether he sees it as a standalone asset.
“Well, I think you could argue that it is an alternative asset,” he said. “It’s certainly quite unique, in the sense that it's a hard asset and it's also highly liquid. It doesn't correlate to Apple or Nvidia, it tends not to, over the long run anyway. Things like Canadian farmland, for instance, that's also a hard asset, but you can't liquidate it quickly. And that's the beauty of gold. It's both a hard asset, and it's highly liquid, highly traded.”
“But what you have touched on, and I think we will see it back again, is many asset managers who never before have included gold in their portfolio, are beginning to do that, because they're looking for alternatives.”
On April 2, HSBC commodity strategists Willem Sels and Lucia Ku said that despite gold’s recent underperformance, the rise of cross-asset correlations makes the yellow metal more valuable than ever as a portfolio diversifier, and they remain bullish on gold’s long-term outlook.
Sels and Ku reiterated their constructive outlook on gold over the next six months, and said the bank is maintaining its Overweight positioning.
"Inflation concerns have also led to rate volatility and a repricing of monetary policy expectations,” they noted. “Policymakers are likely to maintain current interest rates for some time before easing later. We continue to seek quality yields from investment-grade credit and EM local currency bonds for income generation.”
“However, as cross-asset correlations have increased, we use gold and alternative assets to enhance diversification,” Sels and Lu underlined. “Despite the recent pullback, we remain bullish on gold over the medium to long term due to its diversification benefits and safe-haven demand.”
The analysts added that they still expect gold’s recent headwinds to be short-lived, as the underlying fundamentals remain supportive. “Gold continues to serve as a compelling portfolio diversifier amid geopolitical uncertainty and central bank buying,” they wrote.
HSBC has held fast to their positive outlook for the yellow metal throughout the recent pullback. On March 30, analysts at HSBC Asset Management said gold is behaving more like a risk asset in 2026, selling off sharply amid heightened geopolitical tensions and a stronger dollar, but the de-dollarization trend still makes it a good long-term investment.
"Moves in the gold price since the Iran conflict broke out have defied expectations,” the analysts wrote. “The conventional playbook assumed that mounting geopolitical tensions and economic uncertainty would naturally boost the yellow metal, mirroring last year’s ‘Liberation Day’ episode and sustaining a spectacular two-year rally.”
Instead, the yellow metal has done the opposite, they noted, losing 15% to date in March.
“A stronger US dollar has certainly been a headwind, deterring non-US buyers, while a hawkish repricing of interest rates has increased the opportunity cost of holding a non-yielding asset,” the analysts said. “Yet, gold withstood a similar surge in the greenback and rates throughout 2022, weakening this traditional thesis.”
HSBC believes gold is actually behaving like a risk asset in 2026. “Ownership has shifted towards retail and other leveraged buyers, many of whom are forced to liquidate holdings in periods of market stress,” they noted.
"There remains a decent long-term investment case for gold, particularly amid ongoing global de-dollarisation,” the analysts said. “However, the recent volatility offers a stark reminder: robust portfolio diversification demands a broad-based approach."
