Galaxy Securities: Gold's Consecutive Declines Don't Signal Hedging Failure, But Rather a Shift in Pricing Logic from Risk-Driven to Rate-Driven

According to Galaxy Securities research reports, the continuous decline in gold prices is not a failure of safe-haven assets, but a shift in pricing logic from risk-driven to interest rate-driven. Recently, gold has fallen for eight consecutive trading days, with a weekly drop of over 10%, which appears abnormal amid ongoing escalation of geopolitical conflicts. However, fundamentally, it is not that the demand for safe-haven assets has disappeared, but that the market’s primary pricing variables have changed. In the past, escalating conflicts often led to capital inflows into gold, but at this stage, the market’s initial response is to inflation and interest rate paths, causing a phase divergence between gold and geopolitical risks.

Rising oil prices boost inflation expectations, while rising real interest rates become the core factor suppressing gold. Middle Eastern conflicts have pushed oil prices above $100 per barrel, leading to upward revisions of inflation expectations. The March Federal Reserve meeting raised the 2026 PCE and core PCE inflation forecasts to 2.7%, with the dot plot showing most officials supporting only 0-1 rate cuts. Powell also explicitly stated that no rate cuts will occur before inflation shows clear signs of decline. This environment has led to expectations of rising real interest rates, increasing the opportunity cost of holding interest-free assets like gold, which is the main driver of this round of correction.

The strengthening dollar combined with rising interest rates continues to exert downward pressure on gold. Upward revisions in inflation expectations and tightening policy paths have supported the dollar, prompting capital to flow back into dollar assets. Since gold is priced in USD, a stronger dollar directly suppresses its price. From an asset allocation perspective, in the context of rising interest rates and a stronger dollar, funds prefer to allocate to yield-bearing assets rather than hold gold. This transmission chain has been particularly evident in this round of market movements.

Liquidity squeezes and profit-taking amplify volatility, making gold adjustments notably driven by capital flows. Amid increased global market volatility, some institutions, facing margin pressures and portfolio adjustments, have passively reduced holdings of liquid assets, with gold becoming an important liquidation tool. Additionally, gold prices have surged from around $2,000 to nearly $5,000 per ounce over the past two years, with high crowding levels. Geopolitical conflicts have triggered profit-taking among long positions, leading to amplified price corrections.

Central bank gold purchases still provide long-term support but are insufficient to offset short-term interest rate and capital shocks. In 2025, global net central bank gold purchases are expected to remain above 300 tons, offering structural support for gold prices. However, this demand is mainly long-term and slow-paced, making it difficult to counteract short-term capital flows. Coupled with a slowdown in gold purchases at the beginning of 2026, the market currently lacks stable buying support, making prices more susceptible to macroeconomic expectations.

From a broader perspective, gold pricing is transitioning from a “credit logic” to a “interest rate logic.” Previously, gold’s rise was driven more by de-dollarization and geopolitical risks, but now the market is returning to the “inflation—interest rate—dollar” pricing chain. Under this framework, as long as real interest rates rise and the dollar strengthens, gold will struggle to maintain strength, even if risks continue to escalate.

In the short term, downward pressure does not alter the long-term logic; gold still depends on the rebalancing of interest rates and credit. The current environment of high oil prices and high interest rates will inevitably lead to increased short-term volatility. However, in the medium to long term, factors such as central bank gold purchases, reserve diversification, and geopolitical uncertainties remain supportive. Overall, this correction is more about rhythm than a trend reversal.

Risk Warnings

Geopolitical disturbance risks; policy uncertainty risks related to Trump; overseas rate cuts falling short of expectations; domestic policy implementation effects not meeting expectations.

Full Text

Recently, international gold prices have experienced a significant correction, falling for eight consecutive trading days with a weekly decline of over 10%, marking one of the largest adjustments since the 1980s. On March 22, spot gold briefly fell below $4,500 per ounce. This trend appears particularly abnormal against the backdrop of escalating geopolitical conflicts. Traditionally, intensified conflicts tend to increase safe-haven demand, strengthening gold prices. However, the current market performance is contrary to this expectation, and the underlying reason is not the failure of gold’s safe-haven attribute but a phase shift in the dominant asset pricing logic.

From a valuation perspective, the core reason for this decline is the significant suppression of safe-haven logic by interest rate factors. The Middle East conflict has driven oil prices above $100 per barrel, prompting upward revisions of inflation expectations. In this context, the Fed’s March meeting showed a clear shift: while interest rates were held steady, the dot plot indicated most officials support only 0-1 rate cuts, and inflation forecasts for 2026 were raised to 2.7%. Powell explicitly stated that no rate cuts would occur before inflation shows clear signs of decline, and even hinted at the possibility of reconsidering rate hikes. This change in rate expectations has passively elevated the real interest rate center, significantly increasing the opportunity cost of holding gold.

Furthermore, the dollar’s phase strengthening has become a second major factor suppressing gold. The rise in inflation expectations and tightening policy outlooks have supported the dollar index, leading to capital inflows into dollar assets. Since gold is priced in USD, a stronger dollar directly depresses its price. This “interest rate—dollar—gold” transmission chain has been particularly prominent in this market cycle. In other words, gold’s decline is not isolated but occurs within the broader context of a strengthening dollar environment.

Simultaneously, the market has entered a typical “liquidity prioritization” phase, intensifying short-term downward pressure on gold. Amid increased volatility in global equity markets, some institutions, facing margin pressures and risk adjustments, have rapidly liquidated liquid assets, with gold being a key target. Additionally, gold prices surged from below $2,000 to nearly $5,000 per ounce over the past two years, with high crowding levels. In this context, geopolitical conflicts have triggered profit-taking among long positions, leading to amplified price corrections.

From a demand perspective, central bank gold purchases continue to provide long-term support, but their short-term impact is limited. In 2025, global net central bank gold purchases are expected to remain above 300 tons, offering structural support. However, this is mainly a long-term, slow-paced demand, insufficient to offset high-frequency capital flows. Moreover, the pace of central bank gold purchases slowed at the start of 2026, leaving the market short of stable marginal buying support, making prices more sensitive to macro expectations.

Looking at the macro framework, gold pricing is shifting from a “credit logic” back to a “interest rate logic.” Previously, gold’s rise was driven more by de-dollarization, geopolitical risks, and central bank allocations, but now the market is returning to the “inflation—interest rate—dollar” chain. Under this framework, as long as real interest rates rise and the dollar remains strong, gold will find it difficult to sustain a bullish trend, even if geopolitical risks persist.

In the medium to long term, the fundamental support for gold remains intact. Central banks’ continued gold and dollar reserve diversification, rising geopolitical uncertainties, and other factors continue to underpin gold prices. However, in the short term, as long as the “high oil prices—high inflation—high interest rates” environment persists, gold prices are likely to experience increased volatility and phased corrections. Overall, this recent “eight-day decline” is more about rhythm than a reversal of the trend.

Risk Warnings

Geopolitical risks; policy uncertainty related to Trump; overseas rate cuts falling short of expectations; domestic policy implementation effects not meeting expectations.