On March 20, ATFX reported that surging crude oil, natural gas, and fuel prices triggered by Middle East conflicts have intensified global inflation concerns, reducing the likelihood of central banks lowering borrowing costs. Gold prices are heading toward their largest weekly decline in six years. This week, gold has already fallen by over 6%, marking the steepest drop since March 2020. As previously emphasized, the core reason for this unusual decline in gold prices is a fundamental shift in market trading logic.
Since the outbreak of the Iran conflict, gold's performance has echoed its decline in 2022. At that time, energy shocks caused by Russia's invasion of Ukraine rippled through global markets. That year, gold prices fell for seven consecutive months until October, setting a record for the longest losing streak. In both instances, gold's safe-haven appeal was overshadowed by expectations of monetary policy tightening driven by inflation.
After seven consecutive days of declines and a record weekly drop, market participants are focused on two key questions: Why has gold suddenly accelerated its decline? And will bargain hunting emerge to support a rebound after the sharp fall?
Inflation concerns have led to a collapse in rate-cut expectations. This week, central banks including the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan, all holding interest rate meetings, leaned toward hawkish stances regarding inflation worries. As markets scaled back expectations for Fed rate cuts this year, attention turned to the possibility of rate hikes by the other three major central banks later in the year. As institutions pointed out, central banks in Europe and the U.S. held rates steady while sending hawkish signals, boosting expectations for interest rate increases. Tighter monetary policy sparked liquidity turbulence, with precious metals bearing the brunt of the selling pressure. For gold, which generates no interest income, high interest rates typically diminish its attractiveness.
Analysts at Commerzbank noted that the decline in gold and silver reflects the market assigning greater weight to inflation risks stemming from Middle East conflicts, with expectations that the Fed may maintain higher rates for longer. ING analysts stated that although geopolitical tensions usually bolster safe-haven demand, the inflationary impact of rising energy costs is currently pressuring gold.
Since the U.S. and Israel struck Iran last month, the price of this widely regarded safe-haven asset has fallen weekly. This decline is attributed to rising U.S. Treasury yields and a stronger dollar, investors selling gold to cover losses elsewhere, and outflows from gold ETFs.
Following two days of significant adjustment, gold is approaching oversold territory in the short term, potentially indicating accumulating momentum for a rebound from lows. The $4500 level is a key support; intraday, prices may attempt to recoup some losses driven by weekend position adjustments or bargain hunting. However, prevailing weak market sentiment is likely to temporarily cap any rebound. Previously, the U.S. suggested the conflict could end within 2-4 weeks. If so, market dynamics could shift again. A significant pullback in oil prices lowering inflation expectations would likely trigger a clear bottoming and recovery for gold, with prices rebounding as negative factors dissipate. The extent and strength of any recovery will depend on factors like the timeline for restoring normalcy in the Strait of Hormuz, repairs to energy infrastructure and supply resumption, and whether inflation has already been pushed higher in various countries. History from 2022 shows that rate-hike expectations fueled by energy shocks can suppress gold for up to seven months. If the $4500 support fails, it threatens the February low near $4400.
