Why did gold's safe-haven appeal suddenly fail?

Author: Deputy Director of the Global Macroeconomic Research Office, Institute of World Economics and Politics, Chinese Academy of Social Sciences; Source: Mayflower Finance

Abstract

The significant correction in gold prices this round is the result of the resonance of multiple macroeconomic factors in a specific period. Its essence is the temporary suppression of long-term safe-haven logic by short-term pricing logic, rather than the demise of gold's safe-haven attributes. In the short term, high volatility will become the norm in the gold market

Currently, the geopolitical situation in the Middle East remains stagnant, and the outlook is uncertain. According to traditional market logic, the sharp rise in geopolitical risks should be a strong catalyst for safe-haven assets such as gold. However, the recent trend in gold prices has gone against this logic: since March, the price of gold has fallen by more than 15%. Especially on March 23, amid heightened market concerns about a potential escalation of US-Israeli military action against Iran, gold prices even fell by more than 8% intraday. Only after Trump claimed to have held "strong" talks with Iran did gold prices stage a V-shaped rebound, and on March 24 and 25, they continued to rise as expectations of easing geopolitical tensions increased. Faced with the temporary failure of the "gold in turbulent times" logic, the market is questioning: Why has gold price fallen significantly despite escalating geopolitical instability? Does this mean gold has lost its safe-haven appeal? Where will gold's pricing logic and price trends go in the future? This article argues that gold's safe-haven properties have not disappeared, but have been masked by stronger macroeconomic and financial forces in the short term. The current significant pullback in gold prices is essentially the result of a confluence of factors, including profit-taking, the siphon effect of dollar assets, high interest rate expectations, and liquidity squeezes under extreme market sentiment. The conditions for gold's safe-haven properties refer to its ability to maintain zero or even significant negative correlation with traditional risk assets (such as stocks and high-yield bonds) during specific periods of macroeconomic tail risk outbreaks (such as stock market crashes, deep economic recessions, geopolitical upheavals, or systemic financial crises). This safe-haven attribute stems primarily from gold's three core characteristics: no counterparty risk, long-term inflation protection, and extremely high market liquidity. However, the market often falls into a linear thinking trap, blindly believing that "gold will inevitably rise as long as there is geopolitical turmoil." In recent years, while global geopolitical instability has intensified and the dollar has been weaponized, gold prices have reached record highs, seemingly validating this view. However, historically, the realization of gold's safe-haven logic usually depends on specific preconditions. First, real interest rates must be on a downward trend or in negative territory. Since gold is a non-interest-bearing asset, the level of real interest rates directly determines the opportunity cost of holding gold. When the macroeconomy suffers a severe blow, central banks initiate aggressive interest rate cuts, or hyperinflation causes nominal interest rates to lag behind inflation, the rapid decline in real interest rates will greatly enhance gold's safe-haven appeal. For example, in the 1970s, the global economy was mired in stagflation, real interest rates were negative, and gold prices continued to rise. Similarly, after the bursting of the dot-com bubble in 2000, the Federal Reserve implemented significant interest rate cuts to rescue the economy, and the decline in real interest rates fueled a new gold bull market. Secondly, there are concerns about a sovereign credit crisis or the collapse of monetary credit. Gold is essentially an asset inversely related to fiat currencies. When the market experiences a severe crisis of confidence in the stability of a major fiat currency or its ability to repay sovereign debt, global funds will instinctively flee the fiat currency system built on national credit and flow into physical gold, which has no credit risk. The continuous spread and escalation of the European debt crisis from 2010 to 2011 is a typical example. At the time, the market was extremely panicked about sovereign debt defaults in some European countries, directly pushing international gold prices to a record high. Third, geopolitical conflicts that did not trigger a global liquidity crisis. There is a threshold for the impact of geopolitical conflicts on gold prices. Generally speaking, as long as geopolitical turmoil increases the market's risk premium, but is not severe enough to disrupt the liquidity of the global financial system, safe-haven funds will flow into the gold market. For example, in the early stages of the Russia-Ukraine conflict in February 2022, geopolitical panic quickly escalated, and gold prices rose significantly. However, once the crisis crosses the threshold, triggering cross-market panic selling and liquidity runs, gold will also be indiscriminately sold off to obtain cash. In this extreme scenario, its safe-haven properties will temporarily give way to liquidity needs. The logic behind this round of decline is the result of the resonance of multiple macroeconomic factors at a specific stage. Its essence is the temporary suppression of long-term safe-haven logic by short-term pricing logic, rather than the disappearance of gold's safe-haven attributes. Specifically, the current decline in gold prices is mainly driven by the following four factors: Figure 1: Gold Price and US Dollar Index. Note: Gold price refers to the spot price in the London market. Chart source: Wind. Firstly, the significant gains in the previous period triggered a concentrated profit-taking. Since the cyclical low in October 2022, gold prices have seen a maximum increase of over 300%. This epic one-sided rise has placed gold prices at an extremely crowded valuation high, both technically and in terms of sentiment. Since the beginning of 2026, volatility in the gold market has increased significantly (as shown in Figure 1). With a very high base of profit-taking, the market's sensitivity to external shocks has increased significantly. Once there is even a slight adverse disturbance in the macro environment, a large amount of profit-taking funds will be quickly sold off, creating technical downward pressure. Secondly, there is the fundamental divergence under geopolitical shocks, with the appreciation of the US dollar creating a siphon effect. In the Middle East geopolitical crisis, the impact on major global economies has shown significant asymmetry. Thanks to the shale oil and gas revolution, the United States has become a major net energy exporter globally. The surge in international energy prices not only avoids the physical risk of oil shortages but also increases its export revenue; its main risk lies in the impact of a rebound in inflation on the interest rate environment and its secondary risks. In contrast, economies highly dependent on energy imports, such as those in Europe and Asia, face severe risks of imported inflation and supply chain disruptions. This significant divergence in fundamentals has driven global safe-haven capital back to the US dollar. Simultaneously, since international gold is priced in US dollars, a strong dollar also exerts downward pressure on gold prices. Thirdly, the rebound in inflation expectations and the Federal Reserve's hawkish policy stance have increased the opportunity cost of holding gold. The surge in oil prices has triggered a second wave of inflation in the US, potentially slowing the Fed's original pace of interest rate cuts. At its March 2026 FOMC (Federal Open Market Committee) meeting, the Federal Reserve remained on hold, noting that geopolitical conflicts in the Middle East could disrupt the global oil market and cause inflation to remain above the 2% target for an extended period. Fed Chairman Powell's remarks were also hawkish, stating that he would not consider cutting rates until he saw further improvement in inflation, and even hinting that the Fed might begin assessing the tail risks of restarting rate hikes. The CME FedWatch tool showed that the market had begun pricing in no rate cuts this year. As further evidence, on January 30, 2026, Trump officially nominated Kevin Warsh to be the next Federal Reserve Chairman. His tough policy stance of "interest rate cuts + balance sheet reduction" triggered market panic, causing gold prices to plummet by 12.8% in just two trading days. This shows that a hawkish shift in the Fed's monetary policy will put downward pressure on gold prices. Fourth, the sharp adjustment in global risk assets triggered a cross-market liquidity squeeze. Since March 2026, major global stock indices have fallen by an average of over 6%, and some emerging markets (such as the South Korean stock market) have even triggered circuit breakers multiple times. In the event of an extreme scenario involving widespread depreciation of financial assets, institutional investors face severe margin calls. To fill the liquidity gap, gold assets, with their high liquidity and substantial prior unrealized gains, become the primary target for institutional profit-taking. This indiscriminate selling due to liquidity shortages is historically common (e.g., the over 10% drop in gold prices during the global stock market crash in March 2020), and is the direct trigger for the irrational plunge in gold prices on certain trading days in this round. In the short term, high volatility will become the norm in the gold market. On the one hand, after a deep correction in the early stages, gold prices have a technical need for oversold correction, and some left-side trading funds may enter the market to speculate on rebound opportunities, thereby exacerbating market volatility. On the other hand, as long as the sell-off in global equity markets has not stabilized, the US dollar index continues to remain at a relatively high level, and the cross-market liquidity crunch has not eased, gold, as a high-quality, highly liquid asset, still faces downward pressure from institutional selling to fill liquidity gaps. The price of gold will continue to switch between its financial liquidity attributes and its value storage attributes. In the medium to long term, the underlying logic of the reshaping of the international monetary system has not changed, and gold remains an important asset for strategic allocation by global central banks. Leaving aside short-term liquidity and inflation disturbances, the core driving force supporting the long-term bull market in gold has not reversed. First, the disorderly expansion of the US federal government debt and the tendency to monetize fiscal deficits, coupled with the erosion of the neutrality of the dollar system by frequent financial sanctions in recent years, are fundamentally undermining the national credit of the dollar. Secondly, the deglobalization restructuring of global supply chains and the trend towards bloc-based geopolitical confrontation have significantly fueled the financial security demands of non-US economies. This macroeconomic shift is prompting global central banks (especially emerging market central banks) to accelerate their "de-dollarization" strategies, continuously shifting foreign exchange reserves from dollar-denominated credit assets (such as US Treasury bonds) to physical gold, which carries no sovereign credit risk. As long as this long-term structural demand for gold persists, it will provide solid support for the long-term price level of gold.