The Middle East war escalates, yet gold plunges again—when will the king of safe-haven assets return?

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Gold is undergoing an identity crisis. This traditional safe-haven asset has fallen rather than risen after the outbreak of war in the Middle East, leading the market to deeply question its safe-haven attributes.

On Thursday, Trump stated in his speech that extremely severe strikes will be conducted against Iran in the next two to three weeks. The market saw another wave of volatility, with spot gold plunging 3% to $4,626 per ounce. Since the outbreak of the conflict in the Middle East, gold prices have dropped about 15%, with a monthly decline of approximately 12% in March.

Lina Thomas and Daan Struyven, analysts from Goldman Sachs' commodities research team, pointed out in their latest report that this round of decline is driven by three factors: high oil prices raising inflation expectations, the market repricing the Fed's interest rate path to no cuts for the whole year, and forced liquidation of early bullish option positions, amplifying the decline. The current correction is mostly due to technical and short-term macro factors and does not shake their medium-term bullish outlook for gold.

Safe-haven Logic Fails: Why War Suppresses Gold Prices

This round of gold price decline does not mean gold has lost its hedging function, but is a normal market response to the nature of the inflation shock.

Two types of stagflation scenarios impact gold differently.

The first type is when institutional credibility suffers. When the market questions the central bank's willingness or ability to curb inflation, such as the combination of US fiscal expansion and Fed policy mishaps in the 1970s, gold usually rises sharply. The second type is stagflation driven by supply shocks, meaning disruptions in energy supply both suppress economic growth and raise prices. Historically, gold tends to underperform in the early stages of such scenarios.

The current conflict in the Middle East is closer to the latter. Inflation risks triggered by energy supply shocks lead to tighter monetary policy expectations, raising real interest rates and thus suppressing demand for gold ETFs. Meanwhile, stock market corrections have further triggered margin-related gold liquidations.

According to MarketWatch, when gold hit a high of $5,626 per ounce in January this year, the market accumulated large speculative long positions, and demand for call options reached historical highs. After the conflict broke out, deleveraging unfolded rapidly, and traders who used long gold positions to hedge short trades in the “Magnificent Seven” tech stocks, software stocks, or Bitcoin have unwound their positions.

In addition, physical sales by some countries have added extra pressure. Turkey was forced to sell gold to support its currency; the Polish central bank, one of the world's largest strategic gold buyers in recent years, has publicly discussed selling gold for defense expenditures; Middle Eastern oil exporters may also be forced to use gold reserves to pay import bills due to hindered oil exports and a shortage of dollar income.

Three Pillars of Support: Goldman Maintains $5,400 Target

Goldman maintains a baseline forecast for gold to reach $5,400 per ounce by the end of 2026, outlining three core drivers.

First, speculative positions have been largely cleared out, restoring valuation appeal. Comex net speculative long positions have fallen to the 39th percentile in history, and the bullish option positions accumulated since January have basically been closed. The market has currently priced in a more hawkish monetary policy shock than historical precedent.

Historical data shows that negative oil supply shocks typically result in slightly higher policy rates in the first 1 to 3 months, but after 6 to 9 months, growth concerns dominate and rates begin to fall. The normalization of speculative positions is expected to contribute about $195 per ounce to gold prices.

Second, expectations of Fed rate cuts provide price support. It is expected that the Fed will implement two rate cuts totaling 50 basis points in 2026, which is estimated to contribute about $120 per ounce to gold prices.

Third, central bank gold buying forms a medium-term anchor. Under the baseline assumption of no additional private sector diversification, it is expected that once gold price volatility drops, central banks will accelerate gold purchases to about 60 tons per month, above the 52-ton average over the past 12 months. This pace of buying is projected to contribute about $535 per ounce to gold prices.

Extreme Scenarios: Downside $3,800, Upside $6,100

The report also presents two extreme price ranges, revealing the bidirectional risk gold faces.

For downside risk, if a disruption in the Strait of Hormuz lasts longer than expected and triggers larger stock market corrections, or if some investors become disappointed with gold’s performance as a stagflation hedge and choose to close out all remaining macro hedge positions, gold prices could fall to $3,800 per ounce, which is seen as the lower boundary for liquidity liquidation risks.

For upside risk, the medium-term upside is "significant and asymmetric". If the Iran event accelerates private sector diversification away from Western traditional assets, and the Middle East conflict leads the market to revise up concerns over Western long-term defense spending and fiscal sustainability, the upside can be substantial. If macro hedge positions are rebuilt to pre-liquidation levels, gold prices would gain about $750 per ounce, raising the price to about $5,700; if accumulation continues along the previous trend, another $425 per ounce could be added, pushing gold toward $6,100.

Goldman also noted that gold ETF holdings in US private sector portfolios currently account for just about 0.2%, an extremely low allocation. It is estimated that every 1 basis point increase in US private sector gold allocation would raise gold prices by about 1.5%, highlighting the significant nonlinear potential upside.

Wall Street Divergence: Bulls Still Holding Ground

Goldman's bullish stance is not unique, but analysts are starting to diverge.

According to MarketWatch, UBS analyst Joni Teves said on Thursday that in the long run, fiscal or monetary stimulus resulting from slowing growth will support gold on the upside, and the bull market is likely to continue. But for the end of the year, Teves slightly lowered the forecast from $5,200 to $5,000.

The core divergence in the market about gold is: is the failure of its safe-haven property a structural shift, or just a phase-specific deviation due to special shocks? The latter seems more likely. Gold will ultimately reestablish its attractiveness as an inflation hedge and safe haven, but it will need to wait for a fall in real interest rate expectations and further digestion of speculative positions.

Risk Warning and DisclaimerThe market carries risks and investments must be made cautiously. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article fit their specific situation. Investing based on this article is at your own risk. ```