Investing.com -- Citi believes the backdrop for gold is improving as U.S. front-end rates roll over, but the bank said in a note on Friday that it is holding off on adding exposure after a rapid run higher.

The onset of the U.S.-Iran conflict marked the 2026 peak in gold so far, ushering in a period of higher inflation and higher rates that weighs on a non-yielding asset.

With the Strait of Hormuz still closed, the bank said two months of softer-than-expected U.S. data have shown no inflationary spillover from higher energy prices, prompting markets to price in a peak in U.S. front-end rates.

That matters for the metal because, as Citi noted, gold performs particularly well in bull steepening and bull flattening regimes.

Ten-year yields have eased from their highs, the bank noted, while two-year yields are now trading below their 55-day moving average, which is a condition Citi said is generally enough for gold to do relatively well.

The bank added that exchange-traded fund flows in both China and the rest of the world have picked up since mid-July, ahead of the Federal Reserve.

"Hence, signals are starting to turn, and gold has decisively front-ran them," Citi wrote.

Still, the bank flagged that gold is close to its commodities strategists' three-month target of $4,500 an ounce, with a base case of $5,000 over six to 12 months.

Price action has also been poor this week despite lower two-year yields, which Citi attributed to possible profit-taking.

"We'd like to add gold to our trades but wait for prices to consolidate," the analysts concluded.