M4Markets: Gold prices decline due to pressure from high interest rates

On March 20, the war in Iran continues to rage, with soaring oil prices raising inflation concerns. The market expects interest rates to remain high for a longer period. On Thursday, gold prices fell sharply, while other precious metals also weakened. Considering the geopolitical situation, central bank policies, and market capital flows, we interpret the core logic behind the decline in gold prices and its long-term trend. It is believed that this decline in gold prices is not a loss of safe-haven attributes, but rather a result of the suppression by short-term high interest rate expectations and the rotation of capital flows. In the long run, supporting factors such as geopolitical risks and inflation pressures remain unchanged.

The immediate trigger for the decline in gold prices is the Federal Reserve’s decision to maintain interest rates unchanged and the rising expectations for high interest rates. Since the outbreak of the Iran conflict in late February, gold prices have remained in a narrow range of $5000-5200 per ounce. On Wednesday, as expected, the Federal Reserve kept interest rates unchanged and expressed high uncertainty regarding the inflation impact of rising oil prices. They clearly stated they would maintain a wait-and-see attitude, which directly reinforced the market’s expectation that “interest rates will remain high for a longer period.” This, in turn, strengthened the dollar, suppressing the price of non-yielding gold, leading to a breach of the fluctuation range on Wednesday, followed by further significant declines on Thursday.

The expectation of high interest rates not only suppresses gold prices but also triggers a rotation of capital flows in the market. Although gold is a traditional safe-haven asset, amid the ongoing war in Iran, the dollar has strengthened due to high interest rate expectations. Some investors in the Middle East chose to sell gold and buy dollars, while rising bond yields further diverted safe-haven funds away from gold, leading to a situation where gold prices “fall instead of rise in a safe-haven environment.” Yedini Research Company stated that the rising inflation has continuously reduced the likelihood of further interest rate cuts by the Federal Reserve, and this expectation will continue to exert pressure on gold prices, with the possibility of even lowering the year-end gold price expectation to $5000 per ounce.

The ongoing escalation of the situation in the Middle East has not effectively supported gold prices; instead, it has exacerbated inflation concerns by pushing oil prices higher. On Wednesday, Israel attacked Iran’s South Pars gas field, and Iran retaliated on Thursday by attacking energy facilities in neighboring countries, causing already rising oil and gas prices, which had increased due to the closure of the Strait of Hormuz, to soar further. Global inflation pressure continues to rise, and the market’s expectation for central banks to maintain high interest rates has further strengthened, forming a chain reaction of “rising oil prices → inflation concerns → high interest rate expectations → falling gold prices.” However, on Thursday, oil prices reversed, as the Israeli Prime Minister stated that Iran can no longer enrich uranium or manufacture ballistic missiles, temporarily easing market tensions, but this did not change the weak pattern of gold prices.

It is noteworthy that the decline in gold prices is not a loss of its safe-haven attributes, but rather a rotation of short-term capital flows. Joseph Cavatoni, a senior market strategist at the World Gold Council, stated that the rise in real yields in the short term will redirect some capital towards yield-bearing assets, but long-term supporting factors such as geopolitical risks, energy-driven inflation, and monetary policy uncertainty remain. The structural demand from central banks has not changed—central banks, as long-term buyers, focus on reserve diversification and will not adjust their holdings due to short-term interest rate fluctuations, which will become an important support for gold prices.

Moreover, the long-term trend of gold remains constructive. Gold ETFs have seen nine consecutive months of inflows, indicating that market demand for long-term allocation in gold still exists. The current weak performance of gold prices is merely a short-term effect masked by high interest rate expectations. As geopolitical risks continue and inflation pressures accumulate, the strategic allocation value of gold will become more pronounced, and the long-term upward trend remains unchanged.

In summary, the sharp decline in gold prices on Thursday is the result of the combined effects of high interest rate expectations, a stronger dollar, and capital flow rotation. In the short term, the precious metals market will still face pressure from interest rate expectations. It is believed that gold prices may continue to fluctuate and adjust in the short term; if high interest rate expectations continue to rise and oil prices remain high, gold prices may further test support levels. However, if geopolitical situations escalate further, or if inflation pressures exceed expectations, or if central bank policies show signs of easing, gold prices may gain some temporary support. Investors need to pay close attention to the Federal Reserve’s policy guidance, developments in the Middle East situation, and oil price fluctuations, balancing short-term risks with long-term allocation opportunities.

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Editor: Chen Ping