Gui Haoming: After the sharp rise and fall, what is the future of gold investment?

Ask AI · Why the Middle East conflict led to an abnormal drop in gold prices?

Internet News Information Service License No.: 51120180008

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■ Gui Haoming

Since the beginning of this year, international gold prices have been fluctuating dramatically. Especially after entering March, the market’s trend has shifted from the previous surge to a sharp plunge, bringing a major shock to financial markets. In the process, the different trend characteristics shown compared with the past have left investors with a deep impression, and the direction of its next run is also very much a concern.

International gold prices have been rising for several years in a row. By the end of last year, they had climbed above the 4,300 USD/ounce threshold. Regarding the rise in international gold prices, the market generally believes the most fundamental reasons are that the dollar’s status has begun to weaken and that countries around the world have taken de-dollarization measures in their foreign exchange reserves.

By the end of last year, U.S. government debt had already approached 39 trillion USD. Such a huge amount of debt has become a major negative factor in the operation of the U.S. economy, naturally and substantially weakening the dollar’s purchasing power. In addition, the Trump administration’s reckless interference with the Federal Reserve’s monetary policy has seriously threatened the Federal Reserve’s independence, and has also triggered unease across the world. Under these circumstances, with people starting to buy gold in large quantities based on considerations of finding safer assets, and on the need to break away from an excessive dependence on the dollar in foreign exchange reserves, international gold prices kept rising, leading to what has become the biggest bull market in history.

After entering 2026, there is still a lot of capital chasing gold at higher prices. By the end of February, international gold prices briefly reached 5,600 USD/ounce, and institutions were even looking ahead to international gold prices rising to above 5,800 USD/ounce. It should be said that although such a fast rise in pace has made the underlying foundation for market operations less solid, in terms of the overall trend, it seems there is no real problem.

But the Middle East geopolitical conflict that began in late February changed the course of gold. The United States and Israel launched attacks on Iran; all sides fought fiercely, and the fighting spread to multiple countries, leading to disruptions in energy transportation corridors and causing major turmoil across global stock markets.

In principle, when faced with this kind of situation, funds would naturally generate a demand for safe-haven assets, and international gold prices should rise further. But the reality is that gold rose only on the first day when the conflict broke out, and then saw a sharp plunge. By mid-March, it had already fallen to around 4,100 USD/ounce, erasing most of this year’s gains.

Why did such an abnormal situation occur? If we analyze the main reasons, it comes down to these two points.

First, after the war broke out, the U.S. Dollar Index rebounded. This should be related to the fact that the U.S. mainland is far from the battlefield, and that it has a relatively high energy self-sufficiency rate and relatively low dependence on Middle Eastern energy. Therefore, compared with other countries, the U.S. economy has not been hit as severely by the war. For other countries that were hit more strongly, their currency exchange rates are more likely to move downward, and a rise in the dollar typically triggers a decline in gold.

Second, in the earlier period, international gold prices rose too quickly, and many short-term funds participated in it. Once the overall financial market began to shake and global liquidity tightened, it was also easy for these funds to choose to realize profits from gold. As a result, against the backdrop of heightened tension in the Middle East geopolitical situation, international gold prices, contrary to expectations, experienced a sharp drop. This kind of thing that is hard for investors to imagine clearly reflects how complex and changeable the financial market’s operating structure is when affected by unexpected events.

Now, although the fighting in the Middle East is still ongoing, the U.S. debt pressure is also increasing steadily, which makes it difficult for the rebound in the U.S. Dollar Index to be sustained. At the same time, after experiencing the sharp decline, international gold prices have also seen a rebound, with the price returning to 4,500 USD/ounce.

Edited by | Long Xiao

Reviewed by | Wang Wei