The Truth Behind Gold's Crash

Ask AI · What are the common driving factors behind the weakness in A-shares and the decline in gold?

Produced by | Miaodou APP

Author | Ding Ping

Header Image | Visual China

Now even traditional bullish factors like geopolitical conflicts can’t push up gold prices.

On the afternoon of February 28, Beijing time, Israel launched a large-scale “preemptive” strike against Iran, quickly igniting the Middle East tinderbox. As of March 21, the tense situation has lasted 22 days.

Logically, escalation of conflict should boost gold. But the reality is quite the opposite: COMEX gold prices fell more than 17% during this period. On March 19, it plummeted about 5%, briefly breaking below $4,600 per ounce, and the next day further fell below $4,500 per ounce.

On the surface, the pressure on gold is due to the Federal Reserve’s hawkish stance.

On the early morning of March 19, the Fed announced it would keep interest rates unchanged, which was in line with expectations, but the overall tone was clearly hawkish — indicating that the unemployment rate has shown some signs of stabilization and raising inflation expectations; the dot plot also showed most officials still expect one rate cut this year.

In fact, what truly suppressed gold was the prior rise driven by risk factors. And it’s not just gold that was affected—A-shares were also under pressure.

Who is suppressing gold?

Why doesn’t Buffett allocate to gold?

Because gold itself does not generate interest or cash flow; it is a non-yielding asset. It’s not an asset that can appreciate through intrinsic returns. The core opportunity cost of holding gold is the interest rate level.

The higher the interest rate, the greater the returns on cash, deposits, and bonds, making non-yielding assets like gold less attractive; conversely, when interest rates are low, the opportunity cost of holding gold decreases.

But note that this interest rate is not the nominal rate, but the real interest rate (real interest rate = nominal interest rate − inflation rate).

Even if the Fed does not cut rates now, meaning the nominal rate remains unchanged, rising oil prices can push up inflation, causing the real interest rate to fall. At this point, the cost of holding gold decreases, which is why gold is favored as an inflation hedge asset.

So, what caused the big drop in gold?

First, liquidity issues. High leverage positions in the market need to be replenished; as a high-liquidity asset, gold will be passively sold off to meet margin calls or cash needs.

Second, gold’s rapid previous gains led to profit-taking. In a market environment where sentiment is sensitive and risk appetite declines, even if the long-term logic for gold remains unchanged, short-term reactions may be muted or even involve profit realization due to overbought positions.

Therefore, it’s not that the logic for holding gold is broken, nor that rising interest rates will significantly suppress gold prices. Instead, recent gold prices have moved too fast and reached too high a level. The market is shifting from trading logic to trading position.

And the weakening of gold, to some extent, also reflects the loosening of high-position assets.

Assets that previously surged, were crowded, and had concentrated chips, will face similar pressures. This also explains why recent A-shares appear relatively weak:

The high-position assets that once played leading roles, whether in tech or non-ferrous metals, once their positions become too high, the market becomes especially sensitive to negative news. Even minor disturbances can be amplified through valuation, chips, and risk sentiment resonance, leading to oscillation and digestion phases.

When will A-shares find opportunities?

Recently, A-shares have been weak, with trading volume shrinking to around 2 trillion yuan. Besides the fact that the index itself has already accumulated significant gains, another reason is that compared to last year, current liquidity and risk appetite are weakening.

The market is now trading on a more cautious Fed outlook. The escalation of Middle East conflicts has caused oil prices to surge, inflation expectations to rise again, and expectations for Fed rate cuts to decline, putting global liquidity under pressure.

Meanwhile, the Russia-Ukraine conflict shows no signs of easing, Middle East tensions persist, and geopolitical uncertainties increase, further suppressing risk appetite.

Liquidity essentially refers to how much funds are available in the market, mainly observed through policy interest rates, such as the Federal Reserve’s monetary policy cycle; as well as credit expansion indicators like social financing, loans, and M2; and also where funds are flowing—into real estate, infrastructure, or stock markets and real enterprises.

Risk appetite is whether funds dare to buy when they come in, influenced by geopolitics, regulatory policies, and market sentiment. Liquidity and risk appetite affect valuation and are short-term variables.

Given the current environment, the mainline market opportunities in the first half of the year may be limited. But it’s not overly pessimistic.

One key reason is that market expectations for China’s economy are no longer as poor as in previous years. In other words, the fundamental conditions that determine long-term trends have shown marginal improvement.

There are two main reasons.

First, structural advantages are gradually emerging. Although macroeconomic data, like GDP figures, may not look particularly strong, key sectors such as large models and artificial intelligence are beginning to show certain leading advantages. That is, macro data may not be stellar, but the competitiveness of key industries is strengthening.

Data also reflects this. Last year, high-end manufacturing and equipment manufacturing grew by 9.4% and 9.3%, respectively, significantly higher than the overall economic growth of about 5%. This indicates a policy shift away from simply boosting growth through massive stimulus, toward structural optimization and quality improvement.

Second, the change in year-on-year base effects. Although China’s YoY growth has slightly slowed, it is mainly a natural slowdown from a high base.

Moreover, compared to last year, the marginal changes in China’s economic operation since late last year are beginning to show. Many high-frequency indicators, such as PPI, CPI, and retail sales, have shifted from a downward trend to bottoming out and slowly recovering.

For example, in January-February 2026, China’s retail sales grew by 2.8% YoY, an improvement over November and December last year.

In summary, although the economy has not yet entered full recovery, it has gradually moved away from the previous downward trend. Future domestic economic growth is unlikely to return to the high-speed, all-out expansion of the past, but a stable, steady climb is expected.

This marks a shift in the underlying logic.

These two factors have caused a phase adjustment in the market, not a trend decline.

Moreover, policy support remains. The market generally believes that the Shanghai Composite around 3950 is an important defensive level for the national team, even seen as a kind of “KPI.” When the market dips near this level, there tends to be strong support.

When will the market break out of oscillation?

Opportunities may emerge in the second half of this year, when the market environment could improve significantly.

First, liquidity conditions are likely to be better than in the first half. The first half was heavily influenced by external factors. These will gradually ease in the second half, naturally improving liquidity.

Second, from a trend perspective, if we draw a trend line on the 2023 market movement, it forms an upward-sloping channel. The index will continue to fluctuate within this channel, with higher highs and higher lows.

If the first half completes a substantial correction, the market space in the second half could be more optimistic. By then, valuation, liquidity, and policy support from the national team will resonate more strongly.

This is a trend-based judgment, but short-term caution remains essential.

What is the biggest risk?

Among external risks, a key variable remains whether Middle East conflicts will escalate further.

If the situation worsens, A-shares are likely to face some turbulence. However, from China’s own situation, the direct impact is relatively limited and within manageable bounds.

If the US gets deeply involved in Iran, such as engaging in long-term ground warfare, its global strategic focus will be heavily consumed. Additionally, China’s ability to withstand oil price shocks is stronger than many countries.

On one hand, China’s crude oil imports are relatively diversified, with some flexibility and substitution capacity. Even in extreme scenarios, like Strait tensions, it’s unlikely to completely cut off China’s oil supply. At most, transportation efficiency might decline, such as fewer ships, but a total cutoff is very unlikely.

On the other hand, China’s renewable energy substitution is steadily advancing. In the first four months of 2025, new energy vehicles accounted for 42.7% of new car sales, indicating that residents’ sensitivity to oil prices has decreased significantly.

But this does not mean China is insensitive to high oil prices.

The Strait of Hormuz remains the world’s most critical energy transit route. Nearly 15 million barrels of oil pass through it daily in 2025, mostly heading to Asia, with China and India receiving 44%. EIA estimates that in 2024, 84% of oil and condensates transported through Hormuz flow to Asia. This means that if tensions escalate, Asia cannot be completely unaffected.

Oil price shocks affect at least two levels: first, the livelihood level, such as transportation and travel costs, which tend to respond quickly; second, the economic system level, such as chemicals, manufacturing, logistics, and imported inflation, which tend to transmit more slowly but last longer.

Therefore, if Middle East conflicts escalate, A-shares will be affected, but initially through risk appetite decline and oil price volatility, then gradually impacting fundamentals.

In such scenarios, market liquidity and risk appetite will be hard to restore, and high gold prices will struggle to rebound.

Overall, the sharp decline in gold and the oscillation in A-shares are not due to a failure of logic but are normal adjustments of high-position assets and market risk digestion. When the pressure from high positions eases and liquidity and risk appetite recover, both gold and A-shares are expected to usher in new opportunities.

For investors, the key now is to patiently wait for a clear window as the situation becomes clearer.

Disclaimer: The content of this article is for reference only. The information or opinions expressed do not constitute any investment advice. Please make cautious investment decisions.