Trump claimed an escalation in hostilities, causing spot gold prices to drop by 3%. Since the outbreak of the Middle East conflict, gold prices have continued to decline, with a decrease of approximately 12% in March, raising doubts about its safe-haven status. Goldman Sachs believes that this downturn is driven by short-term factors such as the recalibration of inflation expectations, repricing of interest rate paths, and forced liquidation of positions, rather than a structural breakdown. The return of gold's safe-haven appeal will require a decline in real interest rates and further digestion of speculative positions.
Gold is undergoing an identity crisis. This traditional safe-haven asset fell instead of rising after the outbreak of conflict in the Middle East, prompting deep skepticism about its role as a safe haven.
On Thursday, Trump stated that extremely severe strikes against Iran would be carried out within the next two to three weeks. The market experienced renewed volatility, with spot gold plunging 3% to $4,626 per ounce. Since the outbreak of the Middle East conflict, gold prices have fallen by approximately 15%, including a roughly 12% drop in March alone.
Analysts Lina Thomas and Daan Struyven from Goldman Sachs’ commodity research team noted in their latest report that this decline was primarily driven by three factors: high oil prices boosting inflation expectations, markets repricing the Federal Reserve’s interest rate trajectory to no cuts for the year, and forced liquidation of early bullish option positions amplifying losses. The current correction is largely due to technical and short-term macroeconomic factors, without undermining their medium-term bullish outlook on gold.
Failure of the Safe-Haven Logic: Why War Depressed Gold Prices
This round of gold price declines does not signify that gold has lost its hedging function but rather represents the market's normal response to the nature of the inflationary shock.
Two types of stagflation scenarios have markedly different impacts on gold.
The first type involves scenarios where institutional credibility is damaged. When markets question the central bank’s willingness or ability to curb inflation—such as during the combination of U.S. fiscal expansion and Federal Reserve mismanagement in the 1970s—gold tends to surge significantly. The second type is supply-shock-driven stagflation, where energy supply disruptions suppress economic growth while raising prices. Historically, gold typically underperforms broader markets initially under such conditions.
This Middle East conflict more closely resembles the latter scenario. Inflationary risks brought by energy supply shocks prompted markets to price in tighter monetary policies, driving up real interest rates and thereby reducing demand for gold ETFs. Meanwhile, adjustments in the stock market further triggered gold liquidations tied to margin calls.
According to MarketWatch, when gold prices peaked at $5,626 per ounce in January this year, the market had accumulated substantial speculative long positions, with bullish option demand reaching historic highs. Following the outbreak of the conflict, rapid deleveraging occurred as traders who had used gold long positions to hedge short positions in 'Mag 7' stocks, software shares, or Bitcoin rushed to close out their trades.
Additionally, physical selling by certain countries added further pressure. Turkey was forced to sell gold to support its currency; Poland’s central bank, one of the largest strategic gold buyers globally in recent years, has publicly discussed selling gold for defense spending; Middle Eastern oil producers, facing disrupted oil exports and a shortage of dollar revenues, may also be compelled to tap their gold reserves to pay import bills.
Three Pillars of Support: Goldman Sachs Maintains $5,400 Target
Goldman Sachs has maintained its baseline forecast for gold prices to reach $5,400 per ounce by the end of 2026, outlining three key drivers.
First, speculative positions have been significantly cleared, with valuation attractiveness recovering. Net speculative long positions on Comex have dropped to the 39th percentile historically, and bullish option positions accumulated since January this year have largely been unwound. The market is currently pricing in a more hawkish monetary policy shock than historical experience suggests.
Historical patterns show that negative oil supply shocks tend to result in slightly higher policy rates in the initial one to three months, but growth concerns take over after six to nine months, leading to lower rates. The normalization of speculative positions alone is expected to contribute approximately $195 per ounce to the gold price.
Second, expectations of Federal Reserve rate cuts provide price support. The Fed is projected to implement two rate cuts totaling 50 basis points in 2026, which is estimated to add about $120 per ounce to the gold price.
Third, central bank gold purchases serve as a medium-term anchor. Under the baseline assumption of no additional private sector diversification, it is expected that after volatility declines, central banks will accelerate their gold purchases again, buying an average of 60 tons per month, higher than the past 12-month average of 52 tons. This purchasing pace is projected to contribute approximately $535 per ounce to the gold price.
Extreme Scenarios: Downside $3,800, Upside $6,100
The report also provided price ranges for two extreme scenarios, highlighting the two-way risks currently facing gold prices.
On the downside, if the disruption in the Strait of Hormuz persists longer than expected and triggers a larger-than-anticipated equity market correction, or if some investors become disappointed with gold's performance as a hedge against stagflation and choose to fully liquidate remaining macro-hedging positions, gold prices could fall to $3,800 per ounce, which represents the downside boundary of liquidity liquidation risk.
On the upside, the medium-term upward potential is "significant and asymmetric." If events involving Iran accelerate private-sector diversification away from traditional Western assets, while Middle East conflicts lead markets to increase concerns about long-term Western defense spending and fiscal sustainability, the upside for gold prices would be substantial. If macro-hedging positions are rebuilt to pre-selloff levels, this would add approximately $750 per ounce, pushing prices to around $5,700; if the prior accumulation trend continues further, it would contribute another $425 per ounce, driving gold prices toward $6,100.
Goldman Sachs also pointed out that the current holdings of gold ETFs in U.S. private sector portfolios account for only about 0.2%, indicating an extremely low allocation ratio. It is estimated that every one basis point increase in U.S. private sector allocations to gold could lead to a rise in gold prices of approximately 1.5%. This elasticity coefficient reveals a significant nonlinear effect of potential upside space.
Wall Street Divided: Bulls Remain Resolute
Goldman Sachs' bullish stance is not isolated, but analysts are already divided.
According to MarketWatch, UBS Group analyst Joni Teves noted on Thursday that, in the long term, fiscal or monetary stimulus triggered by slowing growth will provide upward support for gold prices, and the bull market for gold is likely to continue. However, regarding year-end forecasts, Teves slightly lowered her projection from $5,200 to $5,000.
The core divergence in the current market for gold lies in whether the weakening of its safe-haven attribute represents a structural shift or a temporary deviation due to specific shocks. The latter is more likely the answer. Gold will eventually reestablish its appeal as an inflation hedge and safe-haven asset, but this requires a decline in real interest rate expectations and further digestion of speculative positions.
Editor/Jayden