21 In-Depth | When Gold No Longer "Hedges Risk"

What are the market logic changes behind AI · Gold’s recent non-hedging behavior?

Southern Finance, 21st Century Business Herald Reporter Wu Bin Report

In the 1970s, driven by the oil crisis, gold experienced a vigorous bull market. Half a century later, the historic blockade of the Strait of Hormuz has once again plunged the world into panic, awakening distant memories.

However, gold has unexpectedly lost its shine. Last week, the price of gold fell more than 10% cumulatively, marking the largest weekly decline since February 1983, and a drop of over 20% from the intraday high of $5,598.75 per ounce on January 29.

By March 23, spot gold further plummeted, repeatedly breaking through multiple key levels, once falling below the $4,100 per ounce mark, erasing all gains made in 2026.

From an “intuition” perspective, under geopolitical turmoil, gold should have shined brightly, yet the reality is quite the opposite. Why has the “king of safe havens” become ineffective? When will gold bottom out? If stagflation truly occurs, will the 1970s scenario repeat?

Why Is Gold No Longer a “Safe Haven”?

During the US-Iran conflict, the US dollar index rose modestly, but gold prices fell sharply. Why has gold continued to decline and lost its “safe haven” status this time?

Zhao Jian, Director of the Western Research Institute, told 21st Century Business Herald that previously, gold prices broke through $5,000 per ounce, driven by expectations of two rate cuts by the Federal Reserve this year. But now, with the outbreak of Middle East conflicts and rising US inflation pressures, the expectation of rate cuts has almost disappeared, and the possibility of rate hikes has re-emerged. Therefore, the sharp retracement in gold prices is essentially a correction of the previously overestimated rate cut expectations.

Second, gold’s safe haven function requires specific scenarios. When risks manifest as liquidity crises, gold prices tend to reflect inflation and long-term war risks more than other factors. Currently, the situation has entered a crisis state, and markets prefer holding cash. As a result, investors may sell off gold, US Treasuries, and other traditional safe assets to raise cash.

Li Huihui, Professor of Management Practice at Lyon Business School, told 21st Century Business Herald that the weakness in gold this time is not due to a “failure of safe-haven” but because this conflict is a highly “energy-intensive” geopolitical shock with supply chain “disruptions.” The blockage of the Strait of Hormuz is seen first not as a financial system risk or credit collapse, but as rising costs in transportation, manufacturing, chemicals, and food supply chains. So, the initial market reaction is not to chase yieldless assets but to return to US dollars and short-term liquidity, re-pricing global interest rate paths. The dollar benefits from liquidity safe-haven flows and the relative advantage of the US as a net energy exporter. US Treasuries do not show traditional safe-haven performance but are pushed higher by inflation expectations. In other words, this is not a scenario where “rising risk necessarily lifts gold,” but rather “rising risk, but faster rising interest rates and dollar.”

After the Russia-Ukraine conflict in 2022, gold prices initially rose, but as energy prices soared and inflation increased, gold fell for seven consecutive months starting from April 2022.

The experience from the Russia-Ukraine conflict can be referenced but may not be directly applicable. Li Huihui explained that in 2022, the market initially traded on geopolitical chaos and European growth risks, so gold rose first; later, as the Fed remained hawkish and the dollar and real yields rose, gold began to retreat. This time, the market is almost immediately reacting to oil price shocks and upward revisions to inflation, skipping the initial safe-haven phase and entering a less favorable second phase for gold. Additionally, the US is now a net energy exporter, which makes the dollar more advantageous in this energy shock scenario, further diverting safe-haven funds away from gold.

Although the current Middle East conflict shares similarities with the Russia-Ukraine situation, Zhao Jian cautions that the duration may not be very long. The US and Israel have not yet deployed ground troops, and even if they do later, it is expected to be limited. As long as the situation remains under control, all parties are likely to reveal their cards within about a month and then gradually move toward negotiations. This differs from Russia-Ukraine, where the US faces internal pressures from inflation and anti-war sentiments.

The market structure itself is changing. Over the past year, gold has continued to rise driven by multiple narratives: central bank gold purchases, de-dollarization trends, geopolitical risks, and concerns over long-term inflation—all forming a strong bullish logic. During this process, gold has increasingly become a “consensus trade”: capital is highly concentrated, and positions are becoming crowded. When nearly all investors agree on the same logic and have completed their allocations, market vulnerability actually increases.

The long-term support for gold—central bank demand—also faces uncertainty. Since the Russia-Ukraine conflict, some countries have increased gold reserves due to concerns over the safety of dollar assets. But in the current energy shock environment, the situation is changing. For some oil-importing countries, high oil prices mean increased foreign exchange expenditure pressures, and their primary goal is to maintain import capacity rather than continue accumulating reserves. For countries relying on energy exports, if transportation disruptions reduce income, they might even sell gold to ease fiscal pressures. This means that the structural buying that once supported gold prices may weaken in the short term.

The “Shadow War” Pattern and the Bottoming Outlook

The US-Israel-Iran conflict has reached a stalemate, and the future remains uncertain.

Regarding the future trajectory, Zhao Jian states that the most likely scenario is what he calls a “shadow war”—neither hot war nor cold war. Shadow war implies that after initial hostilities, all sides have exhausted their ammunition, Iran and Israel are both damaged, US military resources are nearly depleted, and eventually, they turn to mediation. The US president’s war without congressional approval cannot exceed 60 days. If the Strait of Hormuz remains blocked, oil prices could stay above $110 per barrel, intensifying inflationary pressures, and domestic anti-war sentiments in the US are already high.

For gold prices, Li Huihui believes that gold is unlikely to find a true bottom in the short term. The real bottom will not be solely determined by the battlefield but by three factors: oil prices peaking, rate hike expectations peaking, and dollar liquidity peaking. In the next 2 to 6 weeks, gold may still face repeated dips, with the $4,200 level needing to be retested. However, in the medium to long term, she remains optimistic about gold. This gold bull market is supported by four factors: central bank allocations, ETF flows, geopolitical risks, and asset reallocation. But the pace of future gains is unlikely to be as steep as in 2025.

Currently, the market is more focused on “inflation” than on pricing in a recession, and the risk of stagflation may further support gold prices.

Li Huihui emphasizes that the market’s pricing of a recession is still insufficient. The most direct evidence is that the Fed’s March meeting still projects a 2.4% growth rate for 2026; the European Central Bank forecasts only 0.9% for 2026. This indicates that, whether in the US or Europe, official statements acknowledge inflation pressures but have not officially brought recession onto the table. The current issue is not that markets cannot see a recession but that the transmission of recession is lagging behind inflation.

The real danger now is not inflation itself but whether inflation shocks will gradually evolve into profit declines and credit contractions. Many focus on CPI and oil prices, but Li Huihui looks more at corporate profits. Energy prices are essentially a “hidden tax” on society—first squeezing transportation, chemicals, aviation, manufacturing, then household consumption and corporate cash flows, and finally impacting employment and investment. Over the next six months, the probability of a “mild stagflation” or “phase stagflation” is significantly higher than current market expectations—about 55% in the US, 65% in Europe, and even higher in some major Asian energy-importing economies.

Will the 1970s Reappear?

In the 1970s, the oil crisis fueled a gold bull market. The current situation is similar to but also different from the 1970s.

Li Huihui notes that the most similar aspect is that both shocks originate in the Middle East, involving energy first, then inflation, interest rates, and asset valuations, ultimately putting central banks in a difficult position. However, the supply losses from this war—about 11 million barrels per day—exceed the combined scale of the two major oil shocks in the 1970s. Also, global bonds have not shown the classic safe-haven performance this time but have been weighed down by inflation concerns. This scenario resembles the 1970s: supply shocks strike first, and policies are forced to respond afterward.

But key differences make it difficult to simply replicate the 1970s. First, the global economy’s dependence on oil has greatly decreased. Second, the US’s role has changed; since 2019, the US has been a net energy exporter, meaning that under similar oil shocks, the damage to the US is not equivalent to that in the 1970s. Third, the massive inflation of the 1970s was not solely driven by oil; in other words, oil acted more as a spark igniting an already accumulated inflationary fire rather than creating everything from scratch.

Li Huihui does not believe that we will immediately see a full-blown stagflation similar to the 1970s, because long-term inflation expectations are still anchored, and the credibility of major central banks’ policies has not been completely undermined. The issue is not whether stagflation will happen immediately but whether mild stagflation will develop into severe stagflation. This evolution is what warrants close attention in the second half of the year.

If stagflation becomes a reality, will gold perform spectacularly? Li Huihui’s answer is: probably, but not immediately at this stage. Stagflation is actually one of the most favorable macro phases for gold; however, gold’s performance in stagflation usually peaks in the second phase, not the first. In the first phase, markets trade oil, rate hikes, and the dollar, suppressing gold; in the second phase, growth weakens significantly, and risk assets and bonds underperform, allowing gold to truly hedge fiat currency credit and policy errors.

Regarding gold itself, Li Huihui does not support the view that “gold prices have already risen too much and have no room to grow,” nor does she support “copying the 1970s and expecting unlimited surges.” Gold has risen solidly in recent years, driven not solely by sentiment. She expects gold to have further upside in the next year, likely moving in a “high-volatility stepwise” manner, with a probability of reaching $5,000 to $5,200 per ounce within 12 months.

We should also remain cautious about the possibility of extreme inflation prompting the Fed to implement aggressive rate hikes. Zhao Jian believes that restoring peace is no longer realistic. Oil prices may decline from current levels but are unlikely to fall below $80. Global stagflation is now inevitable. In this context, gold still holds value, but the current phase requires passing through this adjustment period—stagflation indeed warrants gold allocation. However, the extent of inflation matters: if inflation exceeds 10%, extreme scenarios like Volcker-era aggressive hikes could trigger a long-term bear market for gold lasting 20 years. But, at present, such a scenario is unlikely.

The “failure” of gold does not mean the end of safe-haven logic. In this storm, gold is no longer the investor’s “first choice,” but it may still be the “last resort.” The seeds of stagflation have been sown, and the erosion of fiat currency credibility continues. Gold still has the resilience to traverse cycles.