Hedge property attributes failing? Gold experiences its largest weekly decline since 2011, with annual gains narrowing to approximately 4%

Question: Why has gold’s safe-haven function temporarily failed amid Middle East conflicts?

According to WisdomTree Finance APP, amid the ongoing escalation of Middle East conflicts, soaring energy prices, and reversing interest rate expectations, the gold market has experienced a sharp sell-off. On Friday, international gold prices continued their decline, recording the largest weekly drop since 2011.

By Friday’s close, spot gold fell sharply by 3.43%, to $4,498.31 per ounce, with a weekly decline of about 9.5%. Spot silver dropped even more significantly, down 6.89%, to $67.801 per ounce, with a weekly decline of over 14%.

The core driver of this gold price decline stems from rapid changes in the macro environment. As conflicts between the US and Iran escalate, energy prices continue to rise, and concerns about a rebound in inflation intensify. Meanwhile, the US dollar and Treasury yields strengthen simultaneously, reducing the appeal of gold as a non-yielding asset.

Changes in market expectations are particularly crucial. Previously dominant expectations of rate cuts have quickly dissipated, with traders now betting that the Federal Reserve may raise interest rates later this year, with the probability rising to about 50%. Expectations of rising interest rates generally suppress gold prices, which is one of the key reasons for this round of correction.

Evolving geopolitical risks also have complex effects on market sentiment. Although conflicts should increase safe-haven demand, markets are more focused on energy supply shocks and their impact on inflation and policy paths. With tensions in the Strait of Hormuz and news of possible US military expansion, investor risk appetite declines, and funds flow into US dollars and other highly liquid assets.

From a market structure perspective, this decline is also influenced by technical and capital factors. Previously, gold prices approached historical highs, attracting substantial long positions, which created inherent correction pressure. When prices started to fall, many stop-loss orders were triggered, accelerating the sell-off. Additionally, liquidity demands from declines in equities and bonds prompted investors to sell gold to offset losses in other assets.

Furthermore, outflows from gold ETFs and a slowdown in central bank gold purchases have also dampened market sentiment. Data shows that gold ETF holdings have decreased for three consecutive weeks, with total holdings down by over 60 tons, indicating short-term capital withdrawal.

Despite the obvious short-term pressure, gold remains on an upward trend for the year, with an approximate gain of 4%. Analysts note that the current correction is more of a phase adjustment driven by dramatic macroeconomic changes. Given ongoing inflation risks, expanding fiscal deficits, and geopolitical uncertainties, the long-term case for gold as an asset allocation has not fundamentally changed.