Why has the gold safe-haven halo suddenly lost its effectiveness?

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

Abstract

The significant correction in gold prices in this round is the result of multiple macro factors resonating at a specific stage. Its essence is the temporary suppression of short-term pricing logic over long-term risk-hedging logic, rather than the disappearance of gold’s hedging attributes. In the short term, high volatility will become the norm in the gold market.

Currently, the geopolitical situation in the Middle East remains tense and uncertain. According to traditional market logic, a sharp rise in geopolitical risks should serve as a strong catalyst for safe-haven assets like gold. However, recent trends in gold prices have run counter to this logic: since March, gold prices have fallen by more than 15%. Especially on March 23, amidst market concerns about a potential escalation of U.S. military strikes against Iran, gold prices even dropped by more than 8% at one point during the day. Only after Trump claimed to have had “strong” conversations with Iran did gold prices rebound in a V-shape, and on March 24 and 25, they rose consecutively with expectations of easing geopolitical tensions.

Faced with the temporary failure of the “gold in chaotic times” logic, the market cannot help but wonder: why has gold price significantly dropped amidst escalating geopolitical turmoil? Does this mean that gold has lost its hedging attributes? Where will the pricing logic and price trends for gold head in the future?

This article posits that gold’s hedging attributes have not vanished; rather, they are overshadowed by stronger macro-financial forces in the short term. The current significant correction in gold prices is essentially a result of the closure of profit-taking positions, the siphoning effect of dollar assets, high interest rate expectations, and liquidity squeezes under extreme market sentiment.

Conditions for Hedging Attributes

Gold’s hedging attribute refers to its ability to maintain zero or even significantly negative correlation with traditional risk assets (such as stocks, high-yield credit bonds, etc.) during specific macro tail risk outbreak periods (such as stock market crashes, deep economic recessions, geopolitical upheavals, or systemic financial crises). This hedging attribute mainly stems from three core features of gold: no counterparty risk, long-term anti-inflation characteristics, and extremely high market liquidity.

However, the market often falls into a linear thinking fallacy, blindly believing that “as long as there is geopolitical turmoil, gold will definitely rise.” In recent years, as global geopolitical tensions have intensified and the dollar has been weaponized, gold prices have reached historical highs, seemingly validating this viewpoint. However, looking back at history, the realization of gold’s hedging logic usually depends on specific preconditions.

First, real interest rates must enter a downward channel or be in negative territory. Since gold itself is a non-yielding asset, the level of real interest rates directly determines the opportunity cost of holding gold. When the macro economy suffers severe blows, central banks embark on aggressive rate-cutting cycles, or when hyperinflation leads to nominal interest rates lagging behind inflation, the rapid decline in real interest rates greatly enhances gold’s hedging appeal. For instance, in the 1970s, the global economy fell into stagflation, with real interest rates negative, leading to a continuous rise in gold prices. Similarly, after the bursting of the dot-com bubble in 2000, the Federal Reserve implemented significant rate cuts to salvage the economy, pushing real interest rates down and sparking a new bull market in gold.

Second, concerns about a sovereign credit crisis or a collapse of currency credit must arise. Gold is essentially an anti-credit asset. When the market experiences a severe trust crisis regarding the stability of a significant legal currency or the repayment capacity of sovereign debt, global capital instinctively flees the fiat currency system based on national credit and flows into physical gold, which carries no credit risk. The ongoing spread and escalation of the Eurozone debt crisis from 2010 to 2011 is a typical case. At that time, the market was in extreme panic over the potential default of sovereign debt in certain European countries, which directly pushed international gold prices to reach historical highs.

Third, geopolitical conflicts must not trigger a global liquidity crisis. There is a threshold for the impact of geopolitical conflicts on gold prices. Generally, as long as geopolitical turmoil raises the risk premium in the market but does not severely damage the liquidity of the global financial system, safe-haven capital will flow into the gold market. For example, in the early stages of the Russia-Ukraine conflict in February 2022, the geopolitical panic quickly escalated, leading to a significant rise in gold prices. However, once the crisis crosses the threshold and triggers panic selling and liquidity squeezes across markets, gold can also face indiscriminate selling to obtain cash. In such extreme situations, its hedging attributes can temporarily yield to liquidity demands.

Logic Behind the Recent Decline

The significant correction in gold prices this time is the result of multiple macro factors resonating at a specific stage. Its essence is the temporary suppression of short-term pricing logic over long-term hedging logic, rather than the disappearance of gold’s hedging attributes. Specifically, the current decline in gold prices is mainly driven by the following four logics:

Note: Gold prices are the spot prices in the London market.

Chart Source: Wind.

First, the massive gains from previous increases have led to concentrated profit-taking. Since the cycle low in October 2022, the maximum range of gold price increases has exceeded 300%. This epic one-sided rise has put gold prices in an extremely crowded valuation territory both technically and sentimentally. Entering 2026, the volatility in the gold market has significantly increased (as shown in Figure 1). With a high profit-taking base, the market’s sensitivity to external shocks has significantly increased; once the macro environment experiences a slight adverse disturbance, the large profit funds will quickly sell off, creating technical downward pressure.

Second, the fundamental differentiation under geopolitical shocks and the appreciation of the dollar create a siphoning effect. In the context of the Middle Eastern geopolitical crisis, the shocks experienced by major global economies show significant asymmetry. Thanks to the shale oil and gas revolution, the United States has become an important net exporter of energy. The surge in international energy prices not only poses no physical risk of oil shortages but also enhances its export revenues; its main risk lies in the impact of rebounding inflation on the interest rate environment and subsequent risks. In contrast, economies in Europe and Asia, which heavily rely on energy imports, face severe input inflation and supply chain disruption risks. This severe fundamental differentiation drives global safe-haven capital back to the dollar. Meanwhile, since international gold is priced in dollars, the strong dollar also exerts downward pressure on gold prices.

Third, rebounding inflation expectations and a hawkish stance from the Federal Reserve have raised the opportunity cost of holding gold. The sharp rise in oil prices has triggered the risk of a secondary rebound in U.S. inflation, potentially delaying the Federal Reserve’s previous rate-cutting pace. At the March 2026 FOMC (Federal Open Market Committee) meeting, the Fed remained on hold and pointed out that the Middle Eastern geopolitical conflict’s disturbance to the global oil market could keep inflation above the 2% target for an extended period. Fed Chair Powell’s statements were also relatively hawkish, indicating that he would not consider rate cuts until further improvements in inflation were seen, and even hinted that the committee might begin assessing the tail risks of restarting rate hikes. The Chicago Mercantile Exchange (CME) FedWatch tool shows that the market has begun pricing in no rate cuts for the year. Evidence of this was seen when Trump officially nominated Kevin Warsh as the next Fed Chair on January 30, 2026, whose hardline stance on “rate cuts + balance sheet reduction” triggered market tightening fears, leading to a 12.8% drop in gold prices within just two trading days. This indicates that a hawkish shift in the Fed’s monetary policy will suppress gold prices.

Fourth, severe adjustments in global risk assets triggered cross-market liquidity squeezes. Since March 2026, the average decline of major global stock indices has exceeded 6%, with some emerging markets (such as the South Korean stock market) triggering the circuit breaker mechanism multiple times. In the event of extreme scenarios where financial assets drastically shrink, institutional investors face severe margin calls. To fill liquidity gaps, highly liquid gold assets, which had previously generated substantial profits, become primary targets for institutional liquidation. This indiscriminate selling caused by liquidity tightening has historically (such as during the global stock market crash in March 2020, when gold prices plunged more than 10%) been seen, and is a direct trigger for the irrational drop in gold prices on certain trading days.

Short-term and Mid-to-Long-term Outlook

In the short term, high volatility will become the norm in the gold market. On one hand, after experiencing a previous deep correction, there is a technical demand for a rebound in gold prices, and some left-side trading funds may enter the market to bet on rebound opportunities, thereby exacerbating market fluctuations. On the other hand, as long as the global equity market’s selling wave has not stabilized, the dollar index remains at a temporarily high level, and cross-market liquidity tightness has not eased, gold, as a high-liquidity asset, still faces downward pressure from institutional selling to fill liquidity gaps. The price of gold will continuously switch between its financial liquidity attributes and value storage attributes.

In the mid-to-long term, the underlying logic of reshaping the international monetary system has not changed; gold remains an important asset for strategic allocation by global central banks. Setting aside short-term liquidity and inflation disturbances, the core driving forces supporting a long-term bull market in gold have not reversed. First, the disorderly expansion of U.S. federal government debt and the monetization tendency of fiscal deficits, coupled with frequent financial sanctions in recent years eroding the neutrality of the dollar system, are fundamentally exhausting the national credit of the dollar. Second, the de-globalization restructuring of global supply chains and the trend of geopolitical confrontation are greatly fostering the financial security demands of non-U.S. economies. This macro shift is prompting central banks globally (especially in emerging markets) to accelerate the implementation of “de-dollarization” strategies, continuously transferring foreign exchange reserves from dollar-denominated assets (such as U.S. Treasuries) to physical gold that carries no sovereign credit risk. As long as this long-term structural demand for gold purchases exists, it will provide solid bottom support for the long-term price center of gold.