Gold, traditionally regarded as a safe-haven asset, has failed to demonstrate its protective qualities during recent Middle East hostilities, with an unexpected decline this week surprising investors.
Rising energy prices due to Middle East tensions have fueled inflation concerns, leading markets to anticipate that major central banks will maintain elevated borrowing costs. As a result, gold prices have fallen for seven consecutive trading sessions. On March 19, spot gold closed down 3.5% at $4,648.23 per ounce, while April U.S. gold futures dropped 5.9% to $4,605.70.
Fawad Razaqzada, Senior Strategist at Gain Capital, noted that gold is caught between opposing forces: geopolitical risks that typically benefit safe-haven assets, and a macroeconomic environment dominated by rising yields and a stronger U.S. dollar. Although gold had previously shown impressive resilience in the face of these headwinds, its performance has weakened in recent weeks. Even with some safe-haven demand from geopolitical tensions, macroeconomic factors have largely overshadowed this support.
As a non-yielding asset, gold tends to perform better in low-interest-rate environments. However, traders no longer expect the Federal Reserve to ease monetary policy this year and have even begun hedging against potential rate hikes.
A similar pattern occurred in 2022 following the Russia-Ukraine conflict. Soaring energy prices drove up inflation, causing gold to decline for seven consecutive months starting in April 2022.
Razaqzada explained that rising energy prices have reignited inflation worries and pushed government bond yields higher, prompting investors to reassess interest rate expectations. With expectations for rate cuts narrowing significantly, shifting policy outlooks have further strengthened the U.S. dollar. This creates a challenging situation for gold, as higher yields generally act as a headwind for non-yielding assets like gold.
The U.S. dollar and Treasury yields have climbed amid the conflict, making gold more expensive for holders of other currencies since it is priced in dollars.
According to Razaqzada, gold remains caught in "macroeconomic turbulence." If oil prices stabilize and bond yields retreat, gold could quickly regain upward momentum. However, given the current balance of factors, volatility is likely to dominate the near-term outlook rather than a clear trend.
Liquidity pressures also play a role. Suki Cooper, Head of Global Commodities Research at Standard Chartered, pointed out that after significant gains in gold and silver prices over the past two years, some investors are taking profits to cover losses in other assets, such as meeting margin calls triggered by declines in equity markets.
It may still be too early to buy the dip. Historical experience from the Russia-Ukraine conflict suggests that gold prices may not have bottomed yet.
Robert Gottlieb, a former Morgan Stanley precious metals trader, cautioned investors against rushing to buy the dip, citing excessive market volatility. Selling pressure may persist until volatility subsides and prices stabilize.
Jamie Dutta, Market Analyst at Nemo.money, noted that investors are concerned that interest rates may remain elevated for longer if energy prices stay high. The longer the Iran conflict persists, the more likely this scenario becomes, which would diminish gold's appeal.
Following the latest U.S. jobless claims data, traders have scaled back expectations for Fed rate cuts in 2026. Meanwhile, bets on European Central Bank rate hikes have increased, with a 75% probability priced in for a third hike this year.
Looking ahead, Jefferies analyst Christopher Lafemina warned that in a prolonged conflict scenario, higher interest rate expectations and a stronger U.S. dollar could further suppress gold prices.
