Financial Deep Dive | Gold Continues to Decline, Why Are "Safe-Haven Assets" Not Acting Safe?

Since March, the situation in the Middle East has remained tense, yet the price of gold, known as a “safe-haven asset,” has fallen for three consecutive weeks, potentially ending its previous seven-month upward trend. Why has gold been on a continuous decline? What does the future hold for its price?

On March 19, the London spot gold price continued to drop, briefly reaching around $4,500 per ounce during the trading session, down over 13% compared to the end of February and nearly 20% from the historical high of $5,596 per ounce on January 29. Notably, gold has now fallen for seven consecutive trading days since March 11. Compared to the six-day consecutive drop in November 2024, this decline has not only been larger but also lasted longer.

From the perspective of domestic gold prices, the Shanghai Gold Exchange spot gold price closed at 1,061 yuan per gram on March 19, a decrease of 4.6% from the previous trading day; since March, the cumulative decline in the price of gold in RMB has reached 7%. As a result, the prices of gold jewelry have plummeted, with many brand gold stores reporting a decrease of over 40 yuan per gram for pure gold jewelry on the 19th compared to the previous day. Since March, many brand gold jewelry prices have cumulatively dropped by over 100 yuan per gram.

Generally speaking, geopolitical conflicts tend to raise market risk aversion, driving up gold prices. For example, after the outbreak of the Russia-Ukraine conflict in February 2022, gold prices surged within half a month. However, since the outbreak of hostilities between Israel and Iran, oil and the dollar have surged, while gold has experienced a continuous decline.

“The counterintuitive trend in gold prices is mainly due to the significant suppression of the safe-haven logic by interest rate dynamics,” said Qu Rui, senior vice president of the Research and Development Department at Dongfang Jincheng. He noted that the ongoing conflict in the Middle East and the continuously rising oil prices are elevating global inflation expectations, which could reinforce the Federal Reserve’s stance on maintaining interest rates, putting pressure on precious metals.

On March 18, the Federal Reserve announced that it would keep the federal funds rate target range unchanged at 3.5% to 3.75%. This marks the second consecutive time this year that the Federal Reserve has maintained interest rates. “The decline in expectations for interest rate cuts by the Federal Reserve, along with the temporary advantages of the dollar as a safe haven, have jointly led to a short-term divergence between gold prices and geopolitical risks,” said Liu Richeng, futures trading manager at Shandong Energy Group.

However, some analysts believe that despite the short-term pressure on gold prices, the medium to long-term demand for gold still has support.

On January 29, customers shop for gold jewelry at a gold store in Qionghai City, Hainan Province. Xinhua News Agency (Photo by Meng Zhongde)

UBS analyst Tevis stated that in the medium to long term, the persistence of geopolitical tensions could lead to a slowdown in global economic growth, prompting global fiscal and monetary policy stimulus measures, which would open up space for gold to rise.

Shenwan Hongyuan Futures believes that concerns over the sustainability of U.S. fiscal policy are still intensifying, combined with the reconstruction of the global political and economic order, diversification of global central bank reserve assets, and the ongoing process of de-dollarization, gold is expected to maintain a long-term upward trend.

Qu Rui reminded that the short-term trend of gold still needs to focus on the Federal Reserve’s potential interest rate cut windows and the evolution of the situation in the Middle East, while being vigilant about potential risks such as unexpected surges in global inflation and the escalation of geopolitical conflicts. (Reporters Ren Jun and Chen Yunfu)