Galaxy Securities: The consecutive decline in gold is not due to a failure of safe-haven assets, but rather because the pricing logic has shifted from being risk-driven to interest rate-driven.

The report from Galaxy Securities states that the continuous decline in gold prices is not due to a failure of safe-haven assets, but rather a shift in pricing logic from being risk-driven to interest-rate driven. Recently, gold prices have fallen for eight consecutive trading days, with a weekly drop exceeding 10%, which seems unusual given the backdrop of escalating geopolitical conflicts. However, the essence is not that the demand for safe-haven assets has disappeared, but rather that the variables prioritized by the market for pricing have changed. In the past, an escalation of conflict often corresponded to capital inflows into gold, while at the current stage, the market’s primary reaction is to inflation and interest rate paths, causing a temporary divergence between gold and geopolitical risks. Short-term pressure does not alter the long-term logic; gold still depends on the rebalancing of interest rates and credit. In the current environment of high oil prices and high interest rates, increased short-term volatility in gold is inevitable. However, from a medium to long-term perspective, central bank purchases of gold, diversification of reserves, and geopolitical uncertainty still provide support. Overall, this round of adjustment is more about changes in rhythm rather than a reversal of trends.

Full text as follows

【China Galaxy Strategy】Why is the international gold price continuously declining and why are safe-haven assets “failing”?

Core Viewpoints

The continuous decline in gold prices is not due to a failure of safe-haven assets, but rather a shift in pricing logic from being risk-driven to interest-rate driven. Recently, gold prices have fallen for eight consecutive trading days, with a weekly drop exceeding 10%, which seems unusual given the backdrop of escalating geopolitical conflicts. However, the essence is not that the demand for safe-haven assets has disappeared, but rather that the variables prioritized by the market for pricing have changed. Past escalations of conflict often corresponded to capital inflows into gold, while at the current stage, the market’s primary reaction is to inflation and interest rate paths, causing a temporary divergence between gold and geopolitical risks.

High oil prices elevate inflation expectations, and rising real interest rates become the core factor suppressing gold. The Middle East conflict has pushed oil prices above $100 per barrel, leading the market to revise inflation paths upwards. In the March meeting, the Federal Reserve raised its 2026 PCE and core PCE forecasts to 2.7%, and the dot plot showed that most officials only supported 0-1 rate cuts. Powell also clearly stated that there would be no rate cuts until inflation shows a significant decline. Under this context, rising expectations for real interest rates have increased the opportunity cost of holding non-yielding gold assets, becoming the core driver of this round of adjustment.

A strong dollar combined with rising interest rates continues to suppress gold. The upward revision of inflation expectations and tightening policy paths have re-supported the dollar, leading to capital flowing back into dollar assets. Since gold is priced in dollars, a stronger dollar directly suppresses its price. From an asset allocation perspective, under the “rising interest rates + strong dollar” combination, capital is more inclined to allocate to income-generating assets rather than holding gold, and this transmission chain has been particularly evident in this round of market dynamics.

Liquidity squeezes and profit-taking amplify volatility, and adjustments in gold have a clear capital property. Against the backdrop of increased volatility in global markets, some institutions have passively reduced holdings of more liquid assets to cope with margin pressures and portfolio adjustments, with gold becoming an important liquidation tool. At the same time, gold prices have risen from $2000 per ounce to nearly $5000 per ounce over the past two years, resulting in a significant increase and high congestion. In this case, geopolitical conflicts have instead become triggers for long positions to take profits, causing price adjustments to exhibit magnified effects.

Central bank gold purchases still provide long-term support but are unable to hedge against short-term interest rate and capital shocks. In 2025, net gold purchases by central banks globally are still expected to exceed 300 tons, providing structural support for gold prices. However, this demand is fundamentally a long-term allocation that is slow-moving and difficult to counter short-term capital flows. Coupled with a slowdown in gold purchasing rhythms at the beginning of 2026, the short-term market lacks stable buying support, making prices more susceptible to changes in macro expectations.

From a broader framework, gold pricing is transitioning from a “credit logic” to a return to “interest rate logic.” In the past, gold increases were more driven by de-dollarization and geopolitical risks, whereas at the current stage, the market has returned to the “inflation—interest rate—dollar” pricing chain. Within this framework, as long as real interest rates rise and the dollar strengthens, gold will struggle to maintain its strength, even if risks continue to rise.

Short-term pressure does not alter long-term logic; gold still depends on the rebalancing of interest rates and credit. In the current environment of high oil prices and high interest rates, increased short-term volatility in gold is inevitable. However, from a medium to long-term perspective, central bank purchases of gold, diversification of reserves, and geopolitical uncertainty still provide support. Overall, this round of adjustment is more about changes in rhythm rather than a reversal of trends.

Risk Warning

Geopolitical disturbance risks; uncertainty risks from Trump’s policies; risks of overseas rate cuts falling short of expectations; risks of domestic policy implementation effects not meeting expectations.

Main Text

Recently, the international gold price has shown a significant correction, falling for eight consecutive trading days, with a weekly drop exceeding 10%, marking one of the largest adjustments since the 1980s. On March 22, spot gold prices fell below $4500 per ounce during trading. This trend seems particularly unusual against the backdrop of escalating geopolitical conflicts; traditionally, increased conflict usually corresponds to rising safe-haven demand and strengthening gold. However, the current market performance is contrary to that; behind this is not a failure of gold’s safe-haven properties, but rather a phase switch in the dominant logic of asset pricing.

From the pricing framework, the core reason for this round of gold decline is that the interest rate logic significantly suppresses the safe-haven logic. The Middle East conflict has driven oil prices rapidly upward, with Brent crude reaching over $100 per barrel, leading the market to revise inflation paths upwards. In this context, the expectations for Federal Reserve policies have changed significantly. Although the March meeting maintained interest rates, the dot plot showed that most officials only support 0-1 rate cuts, while also raising the 2026 PCE and core PCE inflation expectations to 2.7%. Powell also clearly stated that there would be no rate cuts until further declines in inflation are observed and does not rule out the possibility of discussing rate increases again. This change in interest rate expectations has passively raised the central tendency of real interest rates, thereby significantly increasing the opportunity cost of holding gold.

Further, the phase of strong dollar constitutes a second layer of pressure on gold. In the context of rising inflation and tightening policy expectations, the dollar index has re-gained support, leading to capital flowing back into dollar assets. Since gold is priced in dollars, a stronger dollar directly suppresses its price performance, and this “interest rate—dollar—gold” transmission chain has been particularly evident in this round of market dynamics. In other words, gold is not declining in isolation, but is situated within the broader context of a “strong dollar for overall dollar assets.”

Meanwhile, the market has entered a typical “liquidity first” phase, intensifying the short-term downward pressure on gold. Against the backdrop of increased volatility in global equity markets, some institutions are facing margin pressure and the need for risk exposure adjustments, requiring rapid cash recovery. Gold, as a highly liquid asset with deep trading volumes, often becomes the first asset to be reduced. Additionally, from a positioning perspective, gold prices have risen from below $2000 per ounce to nearly $5000 per ounce over the past two years, accumulating a huge increase and high congestion. In this situation, geopolitical conflicts have become triggers for long positions to take profits, resulting in price adjustments exhibiting “momentum crushing” characteristics.

From the demand structure, the long-term support from central bank gold purchases has not disappeared, but its role in stabilizing short-term prices is limited. In 2025, the scale of net gold purchases by global central banks is still expected to exceed 300 tons, providing solid structural demand support for gold prices, but central bank actions are essentially low-frequency, counter-cyclical allocations, making it difficult to hedge against shocks from high-frequency capital flows. Meanwhile, the marginal slowdown in gold purchasing rhythms by some countries at the beginning of 2026 has also left the market lacking stable marginal buying support in the short term.

If we place this round of adjustment within a larger macro framework, we can see a clearer logical switch. For a while, gold’s rise was more driven by “de-dollarization + geopolitical risk + central bank allocation,” while at the current stage, the market has returned to the traditional pricing chain of “inflation—interest rate—dollar.” Within this chain, as long as real interest rates rise and the dollar strengthens, gold will struggle to maintain its strength, even as geopolitical risks continue to rise.

Looking ahead, the medium to long-term support logic for gold has not fundamentally changed. Continuous increases in gold purchases by global central banks, the decline in the proportion of dollar reserves, and rising geopolitical uncertainties continue to constitute important support for gold prices. However, in the short term, as long as the combination of “high oil prices—high inflation—high interest rates” continues to exist, gold prices may still face volatility or even temporary adjustment pressures. In summary, the essence of this round of “eight consecutive declines” is not a failure of safe-haven assets, but rather a result of the market’s pricing shift from “risk-driven” to “interest-rate driven.” When inflation and policy paths become the dominant variables, gold prices may diverge from geopolitical risks temporarily, but this divergence itself reflects the changes occurring in the current macro environment. This means that we need to re-understand the pricing logic of gold; it is not a singular safe-haven asset but rather a composite asset influenced by interest rates, the dollar, liquidity, and risk appetite.

Risk Warning

Geopolitical disturbance risks; uncertainty risks from Trump’s policies; risks of overseas rate cuts falling short of expectations; risks of domestic policy implementation effects not meeting expectations.

(Source: Yicai)