Gold plunges without stopping

Ask AI · Behind the sudden plunge in gold, how do global central bank policies affect the market?

This image appears to be AI-generated.

In recent days, gold’s volatile performance has attracted market attention.

On March 18, spot gold (XAU) prices fell below $5,000 per ounce; on March 19, the decline continued, with intraday lows reaching $4,501.50 per ounce, a drop of over 5% intraday. This week, it plummeted over 10% to a seven-week low, marking the largest weekly decline since March 1983.

Prices at major jewelry stores also dropped more than 100 yuan compared to two days ago. For example, on March 20, Chow Tai Fook’s gold jewelry price was quoted at 1,447 yuan per gram, down from 1,599 yuan per gram on March 11, marking eight consecutive days of price reductions.

As of 7:00 PM on March 20, spot gold was quoted at $4,639.65 per ounce, showing some recovery. However, compared to the peak of $5,594.77 per ounce on January 29 this year, it has fallen over 17%.

Amid renewed Middle East conflicts and increased global risks, why has the safe-haven asset gold suddenly lost its shine?

Unexpected “Flash Crash”

On March 19, intraday declines in spot gold widened to 5%, and silver’s intraday drop expanded to 10%, surpassing market expectations.

The day before, the U.S. Federal Reserve (hereafter “Fed”) concluded a two-day monetary policy meeting.

“Considering that gold and silver had already experienced a significant correction in January, and on the day the Fed meeting ended in March, gold’s decline was limited, we initially thought that gold prices had already priced in expectations of tighter monetary liquidity,” said Li Zhao, head of asset allocation research at China International Capital Corporation (CICC), to China News Weekly. “What was unexpected was that, the day after the meeting, gold and silver experienced another sharp single-day decline.”

Li Zhao explained, “The core reason for the ‘flash crash’ is that since March, major global central banks’ policy statements have been consistently hawkish. At the March FOMC meeting on the 18th, Powell stated he was unwilling to cut interest rates before inflation improves. This reinforced market expectations of delaying rate cuts until 2026, tightening dollar liquidity expectations, and exerting downward pressure on gold prices.”

On March 19, the European Central Bank and Bank of England held monetary policy meetings, also leaning hawkish. The overall tightening expectation of global monetary policy became a trigger for gold’s decline.

Regarding the “flash crash,” Huaxia Fund senior strategist Chen Yanbing added to China News Weekly that, due to previous large gains, crowded speculative positions, and deteriorating chip structure, market internal vulnerabilities were concentrated and released. Triggered by negative news, funds booked profits en masse, leading to rapid sell-offs.

“Gold has surged significantly over the past few years, and valuation models show that current prices are well above equilibrium levels. This makes gold more sensitive to negative factors and reduces its safe-haven function during this shock,” Li Zhao said.

Impact of US-Iran Conflict

The US-Iran conflict erupted on February 28. Driven by risk aversion, spot gold prices surged to $5,419 per ounce on March 2. Subsequently, gold prices weakened sharply, breaking below $5,000 per ounce twice on March 16 and 18, and have remained volatile since.

“Against the backdrop of ongoing Middle East geopolitical tensions, gold prices repeatedly broke key levels, which indeed exceeded many investors’ expectations,” Chen Yanbing said. The direct trigger was the continued escalation of the Hormuz Strait situation, pushing oil prices higher and sparking widespread inflation concerns.

Under inflation worries, after the Fed’s March rate decision, market expectations for rate cuts this year significantly cooled, from previously expecting two cuts to just one, with the timing possibly delayed from June to September. As a non-yielding asset, gold naturally came under pressure.

“Therefore, the investment logic of gold has temporarily shifted to the dollar trend and market liquidity, leading to a transition from rally to decline,” Chen Yanbing explained. Gold’s safe-haven attribute is not unconditional; it hedges against credit collapse and runaway inflation, not liquidity tightening or deflationary pressures.

The market also has other concerns. “The psychological impact of this geopolitical event is far less intense than when Russian assets were frozen in 2022. When the dollar index rises and the oil dollar logic is restored, funds tend to prefer the dollar as a safe haven,” she said.

“Contrary to intuition, geopolitical conflicts are not strong catalysts for gold prices,” said Qian Wei, chief economist for overseas markets and macro assets at CITIC Construction Investment. Reviewing major historical conflicts related to the Middle East, he found that one month before conflict outbreaks, gold prices tended to rise with an average gain of nearly 4%. But three months after the conflict, gold’s performance varied greatly, with no clear upward trend, and even a higher probability of decline within one month.

He noted that, based on historical maximum declines after the Iran-Iraq war, there may still be about a 5% downside space.

What about the future?

Li Zhao said that geopolitical developments, inflation data, and Fed policy guidance remain key risks for the gold market.

His team simulated different scenarios for the US-Iran conflict. If tensions escalate significantly, gold, as the ultimate safe haven, could rise. If tensions ease, inflation fears subside, and the Fed’s rate cut expectations return, gold could also benefit.

If the situation remains unchanged, with low-intensity conflicts between the US and Iran, and market concerns about stagflation, gold may face temporary pressure. “But based on the experience of the Russia-Ukraine conflict, even in such scenarios, gold could first fall and then rise,” he said.

“We believe the gold bull market is not over; we are possibly entering a window for strategic positioning,” Li Zhao said. His team reviewed historical patterns around five major gold peaks and found that the end of a gold bull market is usually triggered by two factors: the Fed ending easing policies or entering a tightening cycle; or a comprehensive improvement in the US or global economy, with inflation declining and growth rising.

“Currently, investors mainly worry about the first reason—Fed tightening risks,” he said. He believes that the current inflation uptick is likely temporary, with US inflation expected to decline again in the second half, and the Fed’s easing cycle may continue. The US economy has not yet reached a turning point of full recovery. “Therefore, the gold bull market could continue for some time.”

However, considering that US inflation data may remain high in the coming months, with potential changes in Fed personnel, communication styles of new Fed Chair, and tail risks from geopolitical events, gold prices could remain volatile over the next 1-2 months.

Chen Yanbing noted that from a technical perspective, the previous deviation of London gold from the 200-day moving average exceeded 40%, far beyond the 24% historical warning threshold. Historically, in a bull market, when the deviation drops below 20%, gold prices tend to stabilize and become healthier.

“Gold prices do not only go up; avoid blindly speculating on short-term swings,” she warned retail investors. If investing via gold ETFs or low-cost products, the proportion of household investable assets should be kept within a reasonable range of 5%–10%, avoiding chasing highs or overleveraging.