A drop is inevitable? Gold bulls are tightly constrained by the "high interest rate curse"

On Monday (May 11) during the European session, spot gold (XAU/USD) experienced a sharp intraday drop, once falling to around $4,690. Although ongoing geopolitical risks in the Middle East should have supported gold prices through safe-haven demand, market expectations for a prolonged period of high US interest rates have rapidly intensified, prompting some investors to take profits. With bullish and bearish factors intertwined, gold is under short-term pressure, and market sentiment is mainly guided by policy expectations, leading to a correction due to profit-taking in the short term.

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The current core logic of the market is shifting from being dominated by safe-haven demand to a recalibration around “inflation risk” and “interest rate expectations.” Trump rejected Iran's latest ceasefire proposal, calling its response "unacceptable," while Iran demanded that the United States compensate for war damages and refused Washington's excessive demands. The deadlock between the US and Iran means that the Middle East situation is unlikely to ease in the short term.

Unlike in the past, this round the market is more focused on inflation risk driven by rising energy prices. With transportation through the Strait of Hormuz disrupted and international crude oil prices remaining elevated, expectations for imported inflation are rising and could force the Federal Reserve to extend the period of high interest rates. The gold market is now caught in a "two-way game": escalation in the Middle East supports safe-haven demand, while strong US economic data and expectations for higher interest rates put a cap on gold's upward momentum.

Last week, the US April Nonfarm Payrolls became a key turning point. The increase of 115,000 new jobs exceeded expectations, the unemployment rate remained at 4.3%, and job market resilience surpassed forecasts. As a result, the market's expectations of a rapid Fed rate cut within the year have cooled, while US Treasury yields and the US Dollar Index have both strengthened.

Capital flows have also diverged, with safe-haven funds continuing to flow into gold ETFs and physical gold, while short-term speculative funds have reduced their long positions at the top. Central bank demand for gold globally remains a long-term support. In the short term, the market is closely watching Fed policy and US economic data; if inflation picks up and high rates continue, gold will be under pressure. If the economy slows significantly, safe-haven and rate-cut narratives may once again dominate gold prices, as the market waits for new variables to break the stalemate.

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