Federal Reserve rate cut expectations cool, gold's safe-haven properties temporarily suppressed

“Why hasn’t gold risen sharply despite such intense fighting?” Recently, many investors have been asking this question in social groups.

Against the backdrop of ongoing Middle East geopolitical conflicts and the blockage of the Strait of Hormuz, a key global shipping artery, gold—traditionally a safe-haven asset—has not experienced the expected surge. Instead, since March, it has been fluctuating downward.

Industry experts believe that a combination of factors—such as declining expectations of Fed rate cuts, the temporary safe-haven advantage of the US dollar, and shifting capital flows—have collectively caused a short-term divergence between gold prices and geopolitical risks. In the short term, gold may fluctuate within a wide range, but in the long term, it still has upward potential.

Safe-Haven Logic Temporarily Suppressed

Since March, international gold prices have not continued their previous oscillating strength but have instead shown a downward trend. Data from Wind shows that on March 2, London spot gold briefly reached a new high of $5,419.32 per ounce during trading, but then sharply retreated and continued to decline. As of 3:00 PM Beijing time on March 17, London spot gold was at $5,010.07 per ounce, a decline of over 5% since March. This performance contrasts with the traditional view of “gold as a safe haven in turbulent times,” confusing many investors.

In response, Wang Yanqing, Chief Analyst of Precious Metals at CITIC Construction Investment Futures, explained that at the end of February, escalating Middle East tensions quickly heightened risk aversion, causing prices of precious metals—traditional safe-haven assets—to rise temporarily. However, this rally driven by risk aversion was very short-lived. As the situation developed, multiple suppressive factors emerged, leading precious metals into a continuous weak and volatile phase.

Xu Ying, Chief Macro Strategist at Dongzheng Derivatives Research Institute, further analyzed that recently, Middle East geopolitical tensions have continued to dominate market trends. The disruption of shipping through the Strait of Hormuz has kept energy and chemical prices rising, which has increased inflation expectations in Europe and the US. This has led markets to lower expectations of Fed rate cuts, with the 2-year US Treasury yield once surpassing 3.75%. If international oil prices continue to climb, market sentiment could reverse, shifting toward expectations of Fed rate hikes. Currently, due to significant increases in crude oil and natural gas prices, European market expectations for rate hikes have already risen.

“Supply shocks increase the risk of stagflation globally, and since the Fed has not introduced additional easing in the short term, the market has entered a phase of stock competition,” Xu Ying said. In this context, funds have started flowing into energy and chemical sectors affected by supply shocks, leading to outflows from precious metals and base metals. Additionally, the recent continuous rise in the US dollar index and US bond yields has further suppressed precious metals.

Amid rising geopolitical risks, gold and some risk assets have recently declined together. Some investors interpret this as a weakening of gold’s safe-haven function, even gradually showing characteristics of risk assets. Wang Yanqing clarified that this perception is mistaken—gold’s safe-haven role has not weakened. The recent abnormal price fluctuations are actually a result of multiple complex factors acting together under specific market conditions.

He added that prior to this, precious metals prices had already surged significantly, with the market fully pricing in long-term geopolitical risks and the weakening of US dollar credit. Therefore, the escalation of Middle East tensions did not provide substantial short-term support for gold prices.

Declining Rate Cut Expectations Are the Main Cause

Why did gold, as a traditional safe-haven tool, fail to continue strengthening amid this geopolitical conflict? Several industry analysts believe that the main reason is the declining expectations of Fed rate cuts, which are linked to chain reactions triggered by geopolitical events.

Historically, Wang Yanqing noted, at the onset of geopolitical crises, precious metals tend to rise due to increased risk aversion. After the Middle East conflict erupted, gold prices initially rose as expected. But as the situation persisted, concerns about the Strait of Hormuz remaining blocked grew, causing multiple chain reactions in the global market and ultimately reversing the upward trend.

He explained that if the Strait remains blocked, Eurasian economies could face significant shocks from shortages of oil and gas, while the US would be less affected. This would lead safe-haven capital to flow into the dollar, strengthening it and suppressing gold priced in USD. Moreover, gold’s safe-haven function mainly lies in hedging against dollar credit risk, but this conflict has not shaken dollar creditworthiness, so its safe-haven role has not been fully realized. Additionally, the escalation has heightened fears of long-term inflation, delaying expectations of Fed rate cuts. Higher interest rates increase the opportunity cost of holding gold, further suppressing its price.

Xia Ying, Head of the Precious Metals and New Energy Research Group at Nanhua Futures, further explained: “In this round of Middle East conflict, gold did not show the traditional safe-haven rally but instead diverged temporarily from the geopolitical situation. This reflects a conflict between safe-haven logic and macro pricing mechanisms.”

She analyzed that this conflict manifests mainly in three aspects: First, shocks to the energy market have altered policy expectations, with real interest rates suppressing valuations. The risk of disruption in shipping through the Strait of Hormuz has pushed oil prices higher, directly affecting inflation trends and weakening the Fed’s expectation of rate cuts this year. Rising US Treasury yields and a rebound in the dollar index have increased real interest rates, which suppress zero-yield assets like gold, offsetting safe-haven demand. Second, the dollar’s safe-haven status has temporarily gained an advantage. The dollar combines safe-haven qualities with liquidity benefits. Earlier, the dollar index was weak, reflecting valuation advantages, but as monetary policy expectations turned hawkish, the dollar rebounded, diverting safe-haven funds and creating a pattern of dollar rising and gold falling. Third, central banks’ liquidity management and strategic sales have triggered phased selling. For example, Russia has sold gold to hedge its fiscal deficit and liquidity overhang, Poland has sold gold for defense financing, and high oil prices have worsened trade deficits and foreign exchange pressures in some emerging markets, leading to reserve liquidation and a divergence from safe-haven demand.

“In short, this geopolitical shock, through the ‘inflation—interest rates—liquidity’ chain, has activated traditional macro factors that suppress gold, temporarily detaching it from safe-haven valuation logic,” Xia Ying summarized.

Institutions Still Optimistic About Long-Term Growth

With geopolitical uncertainties remaining and the Fed’s policy outlook unclear, the future trend of gold remains a focus for investors.

Wang Yanqing said that although uncertainties in the Middle East persist and the impact of the Strait of Hormuz blockage continues, the probability of further escalation is relatively low. In the short term, precious metals are likely to fluctuate within a broad range without a clear directional trend.

Xu Ying combined the US inflation outlook and Fed policy to analyze that since March, international oil prices have risen over 40%, and US inflation pressures are expected to accelerate. Tariffs on imports have already shown their effect. The upcoming Fed rate meeting is expected to keep rates steady, as the Fed continues to observe how geopolitical conflicts impact inflation. Due to concerns about employment, inflation, and financial stability, the Fed is in a dilemma. “If the market continues to trade based on stagflation logic, funds may re-enter the gold market,” Xu Ying predicted. In the short term, gold prices are likely to remain weak and volatile, and investors can wait for pullbacks to buy on dips.

Summer Ying also reminded that this week is a busy period for global central bank meetings. Investors should pay close attention to the March FOMC meeting, which will release economic forecasts and the dot plot, focusing on the Fed’s outlook for inflation, the economy, and monetary policy. Additionally, Fed Chair Powell’s term ends in May, which could also significantly influence market sentiment.

Looking at the longer-term, Summer Ying maintains a strategically bullish view on precious metals, seeing short-term pullbacks as opportunities for medium- and long-term positions. Specifically, for London spot gold, attention should be paid to the support level around $5,000 per ounce, with strong support near the 60-day moving average at about $4,900. Risks include worsening Middle East tensions leading to inflation fears, impacting monetary policy, and economic recession fears causing liquidity pressures.

Wang Yanqing shares a similar long-term optimistic outlook. He stated that, over the long run, the persistent geopolitical tensions, ongoing US debt risks, and the global trend of de-dollarization will continue to support precious metals prices. The third wave of gold’s bull market is expected to continue.