Why Did Gold Prices Fall Instead of Rise as Middle East Tensions Escalated?

Recently, escalating geopolitical conflicts in the Middle East have not led to the expected continuous rise in traditional safe-haven assets like gold. After the US and Israel launched strikes against Iran in late February, gold prices briefly increased but then faced significant selling pressure. Currently, gold is fluctuating between $5,050 and $5,200 per ounce, indicating that market reactions to this crisis differ from previous instances.

Initial Gold Fluctuations and Safe-Haven Demand in the Middle East Conflict

Following the military actions by the US and Israel against Iran on February 28, gold prices rose from $5,200 to over $5,400 per ounce. This initial response aligned with the historical pattern of geopolitical turmoil driving funds into traditional safe assets. However, this rally was short-lived; in early March, gold prices dropped by over 6%, and as of press time, spot gold (XAU) remains around $5,096. This suggests that in the current macroeconomic environment, geopolitical risk alone is no longer sufficient to support a sustained upward trend in gold prices.

Strong US Dollar and Treasury Yields Suppress Gold Prices

The main reason for the recent lack of upward momentum in gold is the strength of the US dollar and rising US Treasury yields. Increased risks to shipping through the Strait of Hormuz have pushed up international oil prices, fueling expectations of prolonged inflationary pressures. To combat potential inflation, central banks may need to keep interest rates high, which raises the opportunity cost of holding non-yielding assets like gold, thereby weakening market demand.

Liquidity Tightening and Institutional Safe-Haven Selling

Beyond interest rates, market liquidity conditions are also crucial. Ross Norman, CEO of metals website Metals Daily, pointed out that sudden international conflicts often trigger market panic. Under liquidity tightening, traders are forced to sell highly liquid assets—including gold—to meet margin calls or rebalance portfolios. This widespread selling explains why gold prices initially declined during the conflict, contrary to traditional safe-haven logic. Additionally, recent high volatility in gold prices has made some large institutions wary of holding physical gold, leading them to adopt a wait-and-see approach.

Long-Term Outlook and Predictions from Foreign Institutions

Despite the short-term volatility and macroeconomic headwinds, most foreign institutions remain optimistic about gold’s long-term prospects. Recent market reports indicate that JPMorgan Chase forecasts gold could reach $6,300 per ounce by the end of 2026, while Deutsche Bank maintains its year-end target of $6,000. This suggests that, after digesting the short-term liquidity shocks, institutions view gold as still playing a key role in hedging extreme risks.

This article explains why gold prices did not rise but fell as the Middle East conflict escalated. Originally published by Chain News ABMedia.