"When the cannon fires, gold flows like water" — doesn't this rule apply anymore? Why is gold falling? Latest institutional analysis

“Big guns roar, gold is worth ten thousand taels.” Since the US-Iran conflict, this saying seems to have lost its effectiveness. The spot price of London gold has fallen nearly 10% since the conflict began, dropping to a low of $4,502 per ounce, with the $4,500 mark once again at risk.

Institutions believe that, based on current drivers, the core of gold’s trend lies in the upward movement of energy prices constraining interest rate expectations. As the Middle East conflict persists and crude oil prices remain high, market expectations for a decline in inflation have become more cautious, weakening the pricing of rate cuts, which has led to a phase of dollar strengthening and suppressed gold prices.

Looking ahead to 2026, institutions say that with the US fiscal deficit remaining high and the long-term trend of de-dollarization continuing (global central banks buying gold), there is still long-term upside potential for gold prices. However, compared to 2025, the marginal changes in the US interest rate cycle and increased trading activity in 2026 may boost gold volatility, requiring more tactical timing.

Gold Faces Continued Adjustment

Since the US-Iran conflict, gold has not continued its upward trend as market expectations suggested, but instead has experienced a significant correction.

On March 18, London gold prices fell 3.86% to $4,813.53 per ounce, and on March 19, dropped sharply by 3.39% to $4,650.50 per ounce, briefly falling to around $4,500. Although there was a rebound on March 20, the monthly correction exceeded 10%.

Cinda Futures points out that, based on current drivers, the core of gold’s movement is energy prices rising and constraining interest rate expectations. As the Middle East conflict continues and crude oil prices stay high—Brent crude futures previously remained above $100—market concerns about inflation stickiness have increased. In this context, market expectations for inflation decline have become more cautious, weakening rate cut expectations, and leading to a phase of dollar strength, which suppresses gold.

Meanwhile, despite weaker employment data earlier, inflation expectations driven by energy are offsetting this bullish factor, making short-term financial attributes of gold somewhat bearish. On the policy front, markets generally expect the Federal Reserve to hold interest rates steady for the second consecutive meeting, but the key lies in forward guidance on the interest rate path, especially Powell’s assessment of inflation and geopolitical impacts, which will directly influence market expectations for future easing.

CITIC Construction Investment revisits history to understand the current market. In a recent research report, CITIC pointed out that, contrary to intuition, geopolitical conflicts are not necessarily favorable catalysts for gold prices. Historical major conflicts related to the Middle East show that: one month before conflict erupts, the probability of gold price increases is high, with an average gain of nearly 4%; but three months after the conflict, gold price trends vary greatly, with no clear upward trend, and even a higher probability of decline within one month, with an average downturn.

Looking at the trend over periods, it’s clear that gold prices tend to rise before conflicts and then enter a period of volatility afterward. Conflicts more closely related to the Middle East, such as the Iraq War, overseas wars, Iran-Iraq War, and Russia-Ukraine conflict, have a higher chance of leading to lower gold prices post-conflict, with the Iran-Iraq War seeing declines of up to 15%.

“After conflicts, overall market risk appetite drops sharply, and liquidity shocks may occur, leading to gold selling; before conflicts, gold prices have already risen, and positive effects materialize after the conflict,” CITIC explained.

Many institutions remain optimistic about gold prices

Although recent gold prices have been weak, many institutions still hold a positive outlook for gold and gold stocks.

Ruo Zhiheng, Chief Economist at Yuekai Securities, states that in the long term, favorable factors supporting gold prices remain, and the recent sharp decline in gold is not a sign of a bull market ending but a deep correction during its ascent. He analyzes from three perspectives:

1. Global geopolitical risks are becoming normalized. The Trump administration’s foreign policy has increased conflict frequency and chain reactions, which will continue to weaken the credibility of the dollar.

2. Non-US central banks remain eager to buy gold, likely pushing up the price center of gold. Under the new normal of geopolitical risks, increasing gold holdings has become an important choice for non-US central banks to hedge sanctions risks and enhance financial security. Emerging market central banks are especially active, with room for further reserve growth.

3. If global economic risks shift from “inflation” to “stagnation,” gold prices could find support. Rising energy prices directly erode consumers’ real purchasing power and may also force monetary tightening, suppressing demand and curbing inflation, potentially leading to economic slowdown or recession. In a stagnation environment, gold’s strategic value will be further highlighted.

Historically, during economic recessions, traditional assets like stocks and bonds often face profit declines and valuation compression, while gold tends to have a relative advantage.

Additionally, the downward pressure on the economy will push central banks toward easing monetary policy. If the Fed shifts toward easing due to employment or recession risks, real interest rates are likely to decline, reducing the opportunity cost of holding gold and opening room for prices to rise.

“Cumulative geopolitical conflicts in the Middle East have shown that the medium-term trend of gold prices still depends on dollar credibility and liquidity factors,” CITIC Securities notes. Looking ahead, they expect that the continuation of loose liquidity and weakening dollar credibility will continue to support higher gold prices.

The firm also states that valuation or price position advantages historically strengthen the upside potential of the gold sector. Currently, the PE valuation of leading companies has fallen to a historic low of 15-20 times PE, and considering the high correlation between recent stock and gold prices, they are optimistic about new highs in gold prices driving stock prices higher.