Is gold's status as a "safe-haven asset" turning into a "risk asset"? What is the accurate way to describe this?

Last week, gold prices in New York dropped sharply from an opening price of $5,010/oz to $4,492/oz, and this week they have fluctuated at a low near $4,500/oz, reaching a minimum of $4,100/oz.

Generally speaking, the escalation of geopolitical conflicts usually boosts risk-averse sentiment, and gold is often seen as the most direct beneficiary asset. However, following the recent escalation of the situation in the Middle East, gold prices have continued to retreat after a brief spike, raising questions about the stability of gold’s safe-haven attributes. If one only looks at the surface phenomena, it seems possible to conclude that “gold’s safe-haven attributes have failed.” But from a more complete pricing framework, what has truly dominated this round of Middle East conflict is the inflation concerns triggered by disruptions in energy supply, interest rate reassessments, and pressures for capital recovery. The traditional safe-haven buying in gold has not disappeared; it has just been unable to outweigh these stronger variables in the short term.

To understand the performance of gold prices in this round, one must return to the basic mechanism of gold’s function. The reason why gold has long possessed safe-haven attributes lies in its non-sovereign credit characteristics, global liquidity, and long-term store of value function. When geopolitical risks, financial turmoil, or credit fears rise, gold often absorbs a portion of defensive allocation demand. At the same time, gold is a typical non-yielding asset, and its short-term price is very sensitive to real interest rates, the strength of the dollar, and market liquidity conditions. Therefore, determining whether geopolitical conflicts are bullish for gold cannot be limited to the level of “risk escalation”; one must also observe how risks ultimately transmit to asset pricing through various macro pathways.

The reason this round of Middle East conflict has pressured gold prices is primarily due to the market’s rapid change in understanding of the nature of the events. The key variables affected by the escalation of the situation in the Middle East include not only the military confrontation itself but also the potential upward risks to energy supply in the Gulf region, shipping security, and international oil prices. The market quickly realized at the initial stage of the conflict that this type of risk primarily corresponds to supply shocks, and the most direct macro consequence of supply shocks is often an increase in inflationary pressure. Once inflation expectations rise, the market’s judgment on monetary policy of major economies adjusts accordingly, with expectations for interest rate cuts being pushed back, and high rates potentially being maintained for a longer period. This means that the opportunity cost of holding gold increases, and the constraints faced by gold valuations simultaneously strengthen. The recent drop in gold prices is less about the decline in safe-haven demand and more about the market interpreting the conflict as a combination of higher oil prices, stronger inflation pressure, and prolonged high interest rates.

From the temporal sequence of price responses, this logic is quite clear. After the outbreak of the conflict, gold prices initially did experience an upward spike driven by safe-haven demand, indicating that geopolitical risks still provided support for gold prices. The issue arose in the following trading days when the market began to focus more on the chain reactions that rising oil prices could bring. As inflation concerns intensified, expectations for a stronger dollar and higher interest rates put more pressure on gold, gradually covering the early safe-haven buying. Around March 25, international oil prices receded, and market worries about further inflation shocks and higher interest rates eased somewhat, leading to a rapid corrective rebound in gold prices. Therefore, it can be seen that the core contradiction in the recent gold market is not whether geopolitical risks exist, but rather whether these risks resemble a “recession shock” or more of a “reflation shock.” In the case of this round of Middle Eastern tensions, the latter clearly has a greater impact on the market.

In addition to changes in macro trends, the position of gold itself has also amplified the downward pressure. Before the outbreak of this round of Middle Eastern conflict, gold prices had already accumulated considerable gains over a long period and reached historical highs in January of this year. In this context, gold is no longer an underweight, undervalued asset waiting for a risk reassessment; rather, it is closer to a high-profile asset that has accumulated a large number of profit-taking positions and trend funds. When new geopolitical events arise, the market originally expected them to further strengthen the bullish logic for gold; however, the reality is that the subsequent variables triggered by the conflict are not friendly to gold, and the confidence of high-level bulls can easily waver. As long as incremental funds are insufficient to continue the support, existing bulls will tend to lock in profits and pull back funds, making it easier for prices to experience concentrated retractions. In other words, geopolitical conflicts may act as a “catalyst” for gold prices to rise during certain phases, while in others, they may trigger conditions for bulls to exit.

This can also be corroborated by funding behavior. Recently, there has been a notable outflow from gold-related ETFs, indicating that institutional funds have not simply interpreted this round of Middle Eastern conflict as a reason to continuously increase their positions in gold. Correspondingly, some funds have shifted towards cash and money market instruments to improve portfolio liquidity and reduce short-term volatility exposure. In extreme risk environments, investors’ primary demands are often to control drawdowns, retain flexibility, and recover cash, rather than immediately chase the most elastic safe-haven assets. Although gold has long-term store of value and defensive attributes, during liquidity prioritization phases, it may also be used for reducing positions and cashing out. Therefore, the rise in geopolitical risks does not necessarily lead to a unilateral increase in gold prices; in the short term, it may even result in gold and stocks being pressured simultaneously while cash becomes more favored.

If we broaden the observation perspective, this round of Middle Eastern conflict provides a crucial insight: gold’s safe-haven attributes have not changed, but whether it can dominate short-term pricing depends on what the conflict ultimately alters. If the risk events primarily lead to global credit contraction, economic growth slowdown, and a warming of easing expectations, gold typically becomes more easily recognized as a standard safe-haven asset; if the risk events drive up energy prices and further exacerbate inflation and high interest rate expectations, the pressure on gold will clearly increase. In this round of Middle Eastern conflict, the market is evidently more worried about the latter scenario, which explains why gold has experienced a significant adjustment even in an environment of heightened geopolitical risks.

The recent decline in gold prices reveals not that gold has lost its safe-haven value, but that the market’s understanding of the term “safe haven” needs further refinement. Hedging has never been a one-directional flow of funds, nor does gold hold an exclusive advantage in every risk scenario. In phases where supply shocks, reflation, and high interest rate expectations dominate, gold may take a back seat; once these suppressive factors ease, there is still room for gold’s defensive attributes to be re-expressed. For investors, what truly needs to be corrected is the linear thinking that mechanically links geopolitical conflicts with rising gold prices. Only by placing gold back into the framework where interest rates, the dollar, oil prices, capital flows, and position structures interact can one more accurately understand its true performance under complex shocks.

Institutional views: On Monday, UBS Global Wealth Management team released a report further strengthening their bullish stance on gold. UBS analyst Wayne Gordon and his team stated that although gold prices have recently declined, they believe investors should still hold gold as a defensive hedging tool. UBS attributes the recent drop in gold prices to several factors, such as weakened investor confidence in the Fed’s rate cuts and reduced market speculation momentum. However, in Gordon’s view, if history serves as a reference, negative outlooks on gold’s future may be premature. He stated, “As the market adjusts to expected higher interest rates and a strong dollar (which are short-term obstacles to rising gold prices), gold’s role as a store of value is under pressure, but this does not signify a failure in gold’s safe-haven performance; rather, it is a delay.”

(Source: Futures Daily)