Over the past week, global financial markets experienced extreme volatility due to news of conflict in the Middle East. Normally, safe-haven assets like gold would attract global capital inflows, but the actual outcome sharply contradicted this expectation.
On days when markets were anxious and most global stocks plunged heavily, gold prices also fell, even testing the 4,100 US dollar level. When risks began to ease or when the US recently announced a delay in attacking Iran’s energy infrastructure, stock markets started to recover, yet gold continued to be sold off.
Thairath Money We take a deep look into why gold prices dropped despite the outbreak of war, which normally would push gold up according to theory. This time, market focus is less on 'fear' and more on 'interest rates, the US dollar, and liquidity,' which are collectively pressuring gold prices.
Sirilak Pakotiprapa, Director of Analysis at Hua Seng Heng Gold Futures Company Limited. She told Thairath Money that many might wonder why gold prices don’t surge during wartime as usual theory suggests. The main reasons can be divided into four points as follows.
1) War drives inflation up, so interest rates may not be cut anymore.
Certainly, the war in the Middle East has pushed energy prices higher, which in turn has raised inflation figures. This situation forces central banks to adopt tighter monetary policies.
Markets now expect the US Federal Reserve may not reduce interest rates this year, while the European Central Bank is forecasted to raise policy rates twice more this year.
Interest rate factors directly pressure gold prices.
2) Strong US dollar = pressure on gold prices.
Normally, when the US dollar strengthens, it negatively impacts gold prices. Since the war began, the US dollar has regained strength and effectively become a short-term 'safe haven' asset.
Moreover, the US is a net oil exporter, so it is less affected by rising energy prices compared to Europe, which depends heavily on energy imports.
This advantage further supports the US dollar’s strength and puts downward pressure on gold prices.
3) SPDR fund sold a large amount of gold.
The SPDR fund sold as much as 48.63 tons of gold, including 4.29 tons just yesterday. The main reason is that investors face tight liquidity, forcing them to sell highly liquid and profitable assets like gold, which returned 64% last year, to raise cash or address portfolio issues, such as meeting margin calls from stock market losses.
Sirilak said that in the long term, gold remains a 'safe haven' asset because it is a tangible commodity with intrinsic value, unlike paper money that can be printed without backing assets.
However, in the short term, gold price behavior is volatile and temporarily resembles a 'risky asset.'
Currently, the short-term trend is clearly downward, with gold prices dropping from 5,600 to 4,100 US dollars. The 4,100 level is a key support at the 200-day moving average; if breached, the long-term trend would turn decisively bearish.
There is also psychological support at 4,000 US dollars, but if this level breaks, automated trading systems with stop-loss orders might trigger further heavy selling, causing prices to plunge significantly.
However, if gold prices hold at these levels, there is still a chance to rebound toward 5,000 US dollars or even retest the previous high of 5,600 US dollars. Investors should closely monitor the war situation and energy prices.
Given the current situation, Sirilak believes that if the war eases and energy prices fall, the theory may reverse and gold could attract buying again, contrary to the usual assumption that war pushes gold prices up.
For those wanting to buy more and willing to accept the risk, it might be wise to gradually accumulate near the 4,100 US dollar support. For lower-risk investors, it is advisable to wait for a rebound toward 4,500 US dollars to consider selling to reduce risk during price recovery, then wait for another dip to buy again at a lower cost.
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