ATFX: Escalating Conflict vs Oversold Signal - Gold Erases All Year-to-Date Gains

Special Topic: ATFX Forex Column Submission

On March 23, ATFX: Due to the ongoing Middle East conflict entering its fourth week, with the US and Iran threatening each other with new attacks, gold prices plummeted during the Asian trading session on Monday, nearly erasing all gains made this year. Gold once fell by 5%, wiping out its entire year-to-date increase. This seemingly abnormal market behavior actually reveals a profound restructuring of gold pricing logic under the current macro environment.

▲ATFX Chart

Last weekend, U.S. President Trump issued an ultimatum to Iran, demanding that it reopen the Strait of Hormuz within two days, or else U.S. forces would bomb its power plants. Iran responded that if its power facilities were attacked, it would “completely” shut down this strategic waterway and target energy, information technology, and seawater desalination infrastructure. The threats from both sides have pushed the Strait of Hormuz— a vital global energy artery— to the brink of a “powder keg.”

Since the conflict erupted on February 28, oil prices have continued to surge, failing to create traditional safe-haven demand for gold. On the contrary, this seemingly favorable factor for gold has, through complex macro transmission mechanisms, become a core force suppressing gold prices.

Rising oil prices have heightened inflation risks, significantly reducing the likelihood of rate cuts by the Federal Reserve and other central banks in the near term. For non-yielding gold, rising interest rate expectations mean a higher opportunity cost of holding gold. Meanwhile, global bond yields are climbing, with U.S. Treasury yields rising for the third consecutive week to multi-month highs. Traders are betting that central banks worldwide may be forced to raise borrowing costs to combat inflation. Under this logical chain, gold has faced sustained pressure, recording eight consecutive days of decline by last Friday—the largest weekly drop since 1983.

Another notable reason for the decline in gold prices stems from market structure. Analysis indicates that during the three weeks since the conflict began, investors have been forced to sell gold to offset losses in other assets in their portfolios. This means that when market volatility rises and risk assets suffer heavy losses, gold—due to its liquidity and accumulated profits—becomes a “cash-out” tool for investors. This cross-asset passive liquidation has further accelerated the decline in gold prices.

From a technical perspective, the current RSI indicates that gold is oversold. Weekly data released by the U.S. government on Friday show that, as of March 17, hedge funds and other large speculators increased their net long positions in gold to the highest level in seven weeks. This suggests that after eight days of sharp declines, there is a technical correction and short covering demand in the market. This provides a basis for a potential rebound.

Looking ahead, the future trend of gold will mainly depend on how the Middle East situation evolves. If threats from the US and Iran remain verbal, the Strait of Hormuz remains unobstructed, and oil prices do not hit new highs, extreme rate expectations may stabilize. In this scenario, gold could see a technical rebound driven by oversold conditions, with funds that had been forced out gradually returning.

However, if the conflict escalates significantly—if the US indeed conducts strikes on Iranian facilities or Iran takes action to block the Strait of Hormuz, causing oil prices to break a key threshold—inflation and rate hike expectations will intensify further. Bond yields will continue to rise, and the upward movement of real interest rates will exert stronger pressure on gold. In such a case, even if safe-haven sentiment increases, it will be difficult to offset the impact of rising rates. Although the Middle East conflict has not yet subsided, the main trading theme for gold is no longer just safe-haven sentiment but a more complex macro transmission chain. In the coming days, the volatility over the Strait of Hormuz and every fluctuation in U.S. bond yields will be crucial indicators for gold’s direction.