Gold "safe-haven asset" becomes "risky asset"? A more accurate way to put it is →

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Source: Futures Daily

Last week, the gold price in New York plummeted from an opening price of $5,010/ounce to $4,492/ounce, and this week it has oscillated at a low near $4,500/ounce, with a minimum touching $4,100/ounce.

Typically, an escalation in geopolitical conflicts tends to elevate risk aversion, and gold is often seen as the most direct beneficiary asset. However, following the recent escalation of the Middle East situation, gold prices have continued to retreat after a brief spike, raising doubts in the market about the stability of gold’s safe-haven properties. If we look only at the surface phenomena, it seems we could conclude that “gold’s safe-haven properties have failed.” But from a more complete pricing framework, the true dominant factors in this round of Middle Eastern conflict are the inflation concerns triggered by energy supply disturbances, interest rate reassessments, and capital withdrawal pressures. The traditional safe-haven demand for gold has not disappeared; it has simply been overshadowed by these stronger variables in the short term.

To understand the recent performance of gold prices, we need to return to the fundamental mechanism of gold’s role. The long-standing safe-haven property of gold stems from its non-sovereign credit characteristics, global liquidity, and long-term store of value function. When geopolitical risks, financial turmoil, or credit concerns rise, gold often absorbs a portion of defensive allocation demand. Meanwhile, gold is a typical non-yielding asset, and its short-term price is highly sensitive to real interest rates, the strength of the dollar, and market liquidity conditions. Therefore, determining whether geopolitical conflicts are bullish for gold cannot remain at the level of “risk escalation”; it is also necessary to observe how risks are ultimately transmitted into asset pricing through macroeconomic pathways.

The reason why the current Middle Eastern conflict has pressured gold prices is that the market’s understanding of the nature of the events has changed rapidly. The key variables driven by the escalation in the Middle East situation include not only the military confrontation itself but also potential upward risks to energy supply, shipping security, and international oil prices in the Gulf region. At the early stage of the conflict, the market quickly realized that these risks primarily correspond to supply shocks, and the most direct macro consequence of supply shocks is often an increase in inflation pressure. Once inflation expectations rise, the market’s judgment on monetary policy in major economies will adjust accordingly, with rate cut expectations being pushed further out and the duration of high interest rates possibly extending. This means that the opportunity cost of holding gold increases, and the constraints faced by gold valuations simultaneously strengthen. The recent retreat in gold prices is less about a decrease in safe-haven demand and more about the market interpreting the conflict as a combination of higher oil prices, stronger inflation pressure, and prolonged high interest rates.

From the timing of price responses, this logic is quite clear. After the outbreak of the conflict, gold prices initially did experience a surge driven by safe-haven demand, indicating that geopolitical risks still provided some support to gold prices. The issue arose in the subsequent trading days, as the market began to focus more on the chain reactions that rising oil prices might bring. As inflation concerns intensified, expectations for the dollar and interest rates rising placed greater pressure on gold, gradually overshadowing early safe-haven buying. Around March 25, when international oil prices fell, the market’s concerns about further inflation shocks and higher interest rates eased somewhat, leading to a rapid rebound in gold prices. This illustrates that the core contradiction in the recent gold market does not lie in whether geopolitical risks exist but rather in whether those risks resemble “recession shocks” or “re-inflation shocks.” In the context of the current Middle Eastern situation, the latter clearly has a larger impact on the market.

In addition to changes in the macro narrative, gold’s own positioning has also amplified the downward pressure. Before the outbreak of this Middle Eastern conflict, gold prices had already accumulated considerable gains over a long period and reached historical highs in January of this year. In this context, gold is no longer an underweighted, undervalued asset waiting for a risk reassessment; instead, it is closer to a high-flying asset that has accumulated significant profit-taking and trend-following capital. When new geopolitical events arise, the market originally expects them to further strengthen the bullish logic for gold, but the reality is that the subsequent variables triggered by the conflict are not favorable for gold, causing high-level bulls’ confidence to easily wane. As long as incremental capital is insufficient to sustain support, existing bulls will be more inclined to lock in profits and withdraw funds, making it easier for prices to experience concentrated pullbacks. In other words, geopolitical conflicts may act as “catalysts” for rising gold prices in certain phases, while in others, they may trigger conditions for bulls to exit.

This can also be corroborated by capital behaviors. Recently, there has been a noticeable outflow from gold-related ETFs, indicating that institutional funds have not simply understood this round of Middle Eastern conflict as a reason to continuously increase their gold holdings. Correspondingly, some capital has shifted towards cash and money market instruments to enhance portfolio liquidity and reduce exposure to short-term volatility. In extreme risk environments, investors’ primary demand is often to control drawdowns, maintain flexibility, and recover cash, rather than immediately chasing the most elastic safe-haven assets. While gold possesses long-term store of value and defensive properties, it may also be used for reducing positions and cashing out during a liquidity-prioritized phase. Therefore, an increase in geopolitical risk does not necessarily lead to a unilateral rise in gold prices; in the short term, it is even possible for gold and stocks to be under pressure simultaneously while cash is more favored.

If we broaden our observational perspective, this round of Middle Eastern conflict provides an important insight: gold’s safe-haven properties have not changed, but whether it can dominate short-term pricing depends on what the conflict ultimately changes. If the main direction of risk events leads to global credit contraction, slowing economic growth, and warming expectations for easing, gold usually finds it easier to become a standard safe-haven asset; if risk events push up energy prices and further exacerbate inflation and high interest rate expectations, the pressure on gold will clearly increase. In this round of Middle Eastern conflict, the market is evidently more concerned about the latter scenario, which explains why gold has experienced a significant adjustment in an environment of rising geopolitical risks.

The recent decline in gold prices reveals not that gold has lost its safe-haven value, but that the market’s understanding of the term “safe haven” needs further refinement. Safe-haven status is never a one-way flow of capital, nor does gold hold an exclusive advantage in any risk scenario. During phases dominated by supply shocks, re-inflation, and high interest rate expectations, gold may take a back seat; once these suppressive factors ease, there is still room for gold’s defensive properties to reemerge. For investors, what truly needs to be corrected is the linear thinking that mechanically correlates geopolitical conflicts with rising gold prices. Only by placing gold back in the framework of the joint effects of interest rates, the dollar, oil prices, capital flow, and position structure can we more accurately understand its real performance under complex shocks. (Jinrui Futures, Wu Zijie)

Institutional Opinion: On Monday, UBS Global Wealth Management team released a report further affirming their bullish stance on gold. UBS analyst Wayne Gordon and his team stated that despite the recent decline in gold prices, they believe investors should still hold gold as a defensive hedging tool. UBS attributes the recent drop in gold to several factors, such as diminished investor confidence in Fed rate cuts and reduced market speculation momentum. However, Gordon believes that if history is any guide, the negative outlook on gold’s future may be premature. He stated, “As the market adjusts to the expected higher rates and a strong dollar (both of which are short-term obstacles to gold prices), gold’s role as a store of value in the early cycle has come under pressure, but this is not a failure of gold’s safe-haven performance; rather, it’s a delay.”

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Editor: Zhao Siyuan