Gold Treads Water as Record Q1 Demand Meets a Divided Fed and Fresh Geopolitical Headwinds

Record Q1 gold demand fades as spot drops 4.7% in May on Iran tensions, strong dollar, inflation, and new Fed chair; Brent above $110 adds risk.

Gold’s price action this week tells a tale of two markets. On one hand, the metal is sitting on a blockbuster first quarter — total demand including over-the-counter turnover hit a record 1,231 tonnes, worth $193 billion. Bar and coin buying alone reached 474 tonnes, central banks added a net 244 tonnes, and ETF inflows contributed 62 tonnes. On the other hand, spot gold slipped to $4,517 an ounce on Thursday, down nearly 0.5% on the day and roughly 4.7% lower over the month. The year-to-date gain still stands at almost 37%, but the short-term momentum has clearly stalled.

Three forces are holding it back. The first is a geopolitical setback: hopes for a quick end to the Iran war are fading. Iran’s Supreme Leader has decreed that the country’s uranium must remain on Iranian soil, directly contradicting Israeli demands. Indirect talks continue, but Tehran has openly stated it distrusts Washington’s approach. The second headwind is a strong dollar and multi-year highs in Treasury yields, both of which raise the opportunity cost of holding non-yielding bullion. The third is resurgent inflation: the US consumer price index rose 3.8% in April, while the producer price index surged 6%. Futures pricing from the CME Group shows 97.4% of market participants expect the Fed to hold rates steady in June — a cut is virtually off the table.

Into this mix steps a new Fed chair. Kevin Warsh was sworn in at the White House on Friday after a historically close Senate confirmation vote of 54 to 45. For gold investors, his arrival injects a fresh layer of uncertainty. Warsh has recently argued for lower interest rates, citing AI-driven productivity gains — a stance that on the surface is gold-friendly. But he may also scale back the Fed’s forward guidance, making monetary policy more data-dependent and less predictable. That would amplify market volatility, with rate expectations swinging on each new release rather than following a pre-communicated path.

The Fed’s own narrative adds to the complexity. Minutes from the 28-29 April meeting flagged financial stability risks as “notable,” specifically citing elevated asset valuations, the rapidly growing private credit segment, and high leverage in hedge fund holdings of US Treasuries. The central bank warned of the possibility of abrupt corrections. For gold, that is a double-edged signal: in times of liquidity stress and credit distrust, the metal is valued less for its inflation hedge and more as a safe haven against systemic breakdown. So far, however, that scenario has not materialised in the price. The Fed held its benchmark rate at 3.50-3.75%, and a majority of participants saw room to tighten further if inflation stays stubbornly above 2%. Three members opposed even the current easing bias in the statement.

The oil market remains the wild card. Brent crude is trading above $110 a barrel, with the Strait of Hormuz still closed. State Street Investment Management sees oil as the key variable: if the price normalises to $80-85, lower real rates and a weaker dollar could propel gold toward $5,000-5,500. J.P. Morgan cut its 2026 average forecast to $5,243 from $5,708 on 18 May, citing weaker investor demand, but kept its year-end target near $6,000 on expectations of a second-half recovery. The London Bullion Market Association’s consensus, based on 28 analysts, stands at $4,742 for 2026.

Today’s University of Michigan May inflation expectations could offer a near-term clue. One-year expectations edged down from 4.7% to 4.5% — a mild relief, but still far above the 3.4% recorded in February before the Iran war began. Meanwhile, the Fed renewed its dollar swap lines with the Bank of Canada, Bank of England, Bank of Japan, ECB, and Swiss National Bank, and several participants discussed extending maturities beyond one year — a sign the central bank is actively shoring up global dollar liquidity, underscoring its stress-mode posture.

Jewellery demand slumped 23% in the first quarter, a stark contrast with the broader demand picture. That divergence captures gold’s current stalemate: record institutional and central bank buying on one side, but a macro environment — higher yields, a strong dollar, a waiting-game Fed, and stalled peace talks — that refuses to give ground. Which force eventually breaks the deadlock depends on whether the financial stability risks flagged in the Fed minutes translate into actual market dislocations. Until then, gold remains trapped in a familiar range, waiting for a catalyst.