The traditional saying that "war drums beat, gold prices soar" appears to have lost its relevance in the recent US-Iran conflict. Since the onset of tensions, the spot price of London gold has fallen by nearly 10%, briefly threatening to breach the key $4,500 per ounce level.
Analysts suggest the primary driver behind gold's recent performance is the renewed constraint on interest rate expectations due to rising energy prices. As the Middle East conflict persists, keeping crude oil prices elevated, market participants have grown more cautious regarding the path of disinflation. This has diminished expectations for interest rate cuts, leading to a temporary strengthening of the US dollar, which in turn exerts downward pressure on gold.
Looking ahead to 2026, institutions note that persistently high US fiscal deficits, combined with the long-term trend of de-dollarization—evidenced by continued gold purchases by global central banks—provide a foundation for potential long-term gold price appreciation. However, compared to 2025, marginal shifts in the US interest rate cycle and increased speculative trading activity in 2026 could heighten gold's price volatility, necessitating greater emphasis on tactical timing.
Gold has experienced a sustained correction since the US-Iran conflict began, contrary to market expectations for a continued rally. On March 18, the spot price of London gold fell 3.86% to $4,813.53 per ounce, followed by another significant drop of 3.39% to $4,650.50 on March 19, with intraday prices dipping close to $4,500. Although gold rebounded slightly on March 20, its monthly decline still exceeded 10%.
Xinda Futures points out that the core factor influencing gold's trend is the impact of rising energy costs on interest rate forecasts. With Brent crude futures previously stabilizing above $100 per barrel, concerns over persistent inflation have intensified. This has made markets wary about the pace of disinflation, reducing bets on monetary easing and supporting a stronger dollar, which weighs on gold. Furthermore, although recent jobs data was weak, inflation expectations fueled by energy prices are offsetting this supportive factor, making gold's financial attributes短期内 bearish.
On the policy front, the market widely anticipates the Federal Reserve will hold rates steady for a second consecutive meeting. The crucial factor, however, will be the forward guidance on the interest rate path, particularly Chair Powell's assessment of inflation and the impact of geopolitical conflicts, which will directly influence market expectations for future easing.
CSC Financial has analyzed historical patterns to understand the current market dynamics. Contrary to intuition, geopolitical conflicts are not necessarily a positive catalyst for gold prices. A review of major Middle East-related conflicts shows that gold prices tend to rise in the month preceding a conflict, with an average gain of nearly 4%. However, in the three months following the outbreak of conflict, gold price movements are highly varied, showing no clear upward trend and even exhibiting a higher probability of decline within the first month, with average performance turning negative. Examining price action over these periods reveals a similar pattern: gold generally trends upward before a conflict but enters a period of volatility afterward. For conflicts with closer ties to the Middle East, such as the Iraq War, the Gulf War, the Iran-Iraq War, and the Russia-Ukraine War, gold prices have a higher likelihood of declining post-conflict, with prices falling as much as 15% after the Iran-Iraq War.
CSC explains that after a conflict erupts, overall market risk appetite typically plummets, and liquidity shocks may occur, leading to sell-offs in gold as well. Furthermore, since gold often rallies in anticipation of conflict, the actual outbreak can represent a "buy the rumor, sell the news" event.
Despite recent weakness, many institutions remain optimistic about the outlook for gold and gold-related equities. Yuekai Securities Chief Economist Luo Zhiheng stated that favorable long-term drivers for gold prices remain intact. He views the current sharp decline not as the end of the bull market, but as a deep correction within a broader uptrend. He bases this analysis on three factors: First, the normalization of global geopolitical risk, exacerbated by the Trump administration's foreign policy leading to more frequent and interconnected conflicts, will continue to undermine confidence in the US dollar. Second, strong gold purchasing intentions by non-US central banks are expected to keep elevating gold's price floor. In the new normal of heightened geopolitical risk, increasing gold reserves has become a crucial strategy for these central banks to mitigate sanction risks and enhance financial security, with emerging market central banks being particularly active and having significant room for further reserve growth. Third, if global economic risks shift from "inflation" to "stagflation," gold is likely to find support. High global energy prices erode household purchasing power and may force monetary tightening, ultimately suppressing demand and potentially leading to economic slowdown or recession. In a stagflationary environment, gold's strategic value becomes more prominent. Historically, during recessions, traditional financial assets like stocks and bonds face pressure from declining earnings and contracting valuations, while gold tends to offer relative outperformance. Additionally, economic downturns often pressure central banks to adopt accommodative policies. If the Fed adjusts its stance due to employment concerns or recession risks, real interest rates could enter a downward trajectory, reducing the opportunity cost of holding gold and creating room for price appreciation.
Citic Securities notes that following past Middle East conflicts, gold's medium-term trajectory has ultimately depended on US dollar credibility and liquidity conditions. Looking at the current conflict, the firm expects the continuation of abundant liquidity and a weakening US dollar credit trend to continue pushing gold prices higher. The broker also highlighted that historically, attractive valuations have amplified the upside for gold equities. Currently, leading gold companies' PE ratios have retreated to historically low levels of 15-20x. Given the high correlation between recent stock price peaks and gold price highs, the firm is optimistic that new highs in gold prices will drive corresponding new highs in gold stock prices.
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