Bullion Capped by Inflation Concerns Despite Oil Price Surge Amid West Asia Flare-Up: Analysts

Gold and silver prices are expected to remain under pressure in the short term as central banks maintain a hawkish posture and delay interest rate cuts in response to heightened crude oil prices, analysts said.

While crude oil-driven inflation traditionally boosts precious metals, analysts warn that hawkish monetary policy responses could cap near-term gains for bullion.

According to experts, the bullion market's reaction to oil price shocks now depends less on inflation figures alone and more on how central banks respond. "Historically, sharp rallies in crude oil prices have triggered inflationary pressures, as witnessed during the 1970s oil embargo and several Middle East crises," said Manav Modi, Commodities Analyst at Motilal Oswal Financial Services Ltd (MOFSL).

Usually, gold and silver see a strong upward momentum during inflationary pressures triggered by a spike in crude prices.

However, gold and silver have defied established market trends during the recent escalation in the US-Iran conflict, which has threatened nearly a fifth of the world’s energy supplies moving through the Strait of Hormuz. ​ The fresh escalation in the Middle East has led to sharp volatility across commodity markets since last week.

Brent crude was trading near $68 a barrel before the conflict in West Asia in late February and surged to as high as $126.41 per barrel by mid-April amid the peak hostilities.

Later, oil prices retreated to around $70 after tensions eased between the US, Israel and Iran, before climbing back to about $90 a barrel.

The sharp swings in energy markets coincided with a steep correction in precious metals. Gold futures, after scaling a record $5,706 an ounce earlier this year, have fallen about 29% to around $4,070 an ounce.

Silver futures have declined more than 52% from their all-time high of $124.25 an ounce hit on January 29. The white metal is currently hovering around $59 an ounce globally.

Rather than sparking a runaway precious metals rally, the recent oil supply disruptions have instead raised expectations that central banks across major economies will keep monetary policy tighter for longer, effectively capping bullion’s short-term gains. ​ According to analysts, the response of central banks to inflationary pressure could also affect the precious metal price trends in the short-term.

The latest flare-up in West Asia has highlighted a divergence across commodity markets. Crude has retained a geopolitical premium amid concerns over supply disruptions, while bullion has failed to keep pace, as investors weigh whether elevated energy prices will keep interest rates higher for longer, Modi said.

According to Modi, the long-term implications differ, as persistently high oil prices worsen fiscal deficits, elevate debt burdens, and create macroeconomic imbalances, which ultimately support safe-haven demand for precious metals.

He explained that not "all geopolitical conflicts have the same market impact".

The Russia-Ukraine conflict was largely territorial and had a relatively limited long-term impact on oil prices.

"In contrast, tensions involving the Middle East directly threaten global energy supplies through key transit routes like the Strait of Hormuz, making crude oil far more sensitive," Modi noted.

According to Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities, the market's response to higher crude prices now depends more on how global central banks react than on inflation alone.

"If higher oil prices increase inflation expectations and prompt the Federal Reserve to maintain a hawkish stance or delay rate cuts, bullion prices can remain under pressure in the short term.

"However, once higher rates are fully priced in, and inflation concerns persist, gold and silver regain strength as investors seek inflation hedges," he said, adding that bullion has not lost its safe-haven appeal despite the recent correction, with part of the investment flows shifting towards technology and AI-linked sectors.

Kaveri More, Commodity Analyst at Choice Broking, said silver's dual role as both a precious and industrial metal makes it more vulnerable than gold during periods of elevated energy prices.

In the case of silver, More said the picture is more complex, as the dollar, inflation trends and bond yields also play a significant role.

"These macro factors have recently exerted downward pressure on precious metals, even against a tense geopolitical backdrop, with silver tending to outperform gold in relative terms," she added.

Manav Modi of MOFSL said silver could still perform in line with gold, but meaningful outperformance would require stronger industrial demand, particularly from sectors linked to copper, zinc and manufacturing, along with a more supportive global monetary environment.

Institutional investment behaviour has also turned more selective, he noted, with elevated bond yields attracting a larger share of institutional capital towards fixed-income assets and moderating ETF inflows into precious metals.

However, he expects institutional allocations towards gold and silver to improve once inflation stabilises and expectations of policy easing, driven by their long-term diversification benefits.

Looking ahead, Modi expects crude oil to remain supported as long as geopolitical tensions persist, with domestic prices likely to remain in the ₹6,800-8,500 per barrel range.

He said gold could find support around $4,000 an ounce in the global markets, while silver is expected to remain in a broad range of $65-72 per ounce.

Analysts said investors should monitor crude inventories, developments around the Strait of Hormuz, inflation data, global central bank policy decisions, Treasury bond yields and the US dollar to assess the direction of commodity markets