In the past two weeks, London spot gold fell by 3.40% to $5,044.60 per ounce, while SHFE gold declined by 1.30% to 1,133.00 yuan per gram. Open interest for Shanghai gold futures increased by 3.56% to 313,000 contracts. How should this short-term sharp drop in precious metals be interpreted?

Financial institutions generally maintain a positive outlook on gold's medium to long-term rebound potential but also highlight near-term volatility risks. The rationale centers on three key aspects: (1) The core drivers behind the recent decline stem from a triple pressure of inflation, interest rates, and liquidity; (2) Historical analysis indicates that while short-term impacts are often transient, long-term structural factors are more decisive; (3) In forward pricing of precious metals, gold continues to significantly outperform silver.

Market professionals show greater confidence in gold's trajectory. Under stagflationary conditions, gold's monetary attributes and inflation-hedging advantages become prominent, with ongoing central bank purchases and de-dollarization trends providing sustained support. Silver's upside is constrained, with only intermittent opportunities arising from tight inventory conditions.

The recent sharp decline in precious metals is not due to a failure of safe-haven demand but is driven by a chain reaction: rising inflation leads to delayed interest rate cuts, pushing up real yields and triggering liquidity-driven sell-offs.

Prolonged conflict in the Middle East has elevated energy prices, shifting market expectations from a "blitzkrieg" to a "protracted war" scenario and rapidly heating up inflation expectations. This directly limits the Federal Reserve's room for rate reductions. The March FOMC meeting revised inflation and growth forecasts upward, with the dot plot indicating only one rate cut in 2026. FedWatch tools now price in no rate cuts for the year, strengthening both real interest rates and the US dollar, thereby pressuring non-yielding precious metals.

Concurrently, previous substantial gains in gold and silver led to crowded trades. A surge in the VIX index worsened risk appetite, prompting institutions to sell highly liquid, profitable precious metals to raise margin and liquidity, resulting in broad-based selling. Gold, with its pure monetary properties, demonstrated relative resilience, while silver suffered a steeper decline due to its industrial demand exposure and liquidity shocks, causing the gold-silver ratio to rebound quickly.

Under this logic, precious metals are expected to remain under pressure in the early second quarter, with risks of prices testing annual support levels in extreme scenarios.

Historical reviews of events such as the Gulf War, Iraq War, and Israeli-Palestinian conflicts show that geopolitical tensions typically cause short-term spikes in precious metals, with medium to long-term performance diverging—contrary to the simplistic view that conflict automatically boosts gold.

Safe-haven demand initially lifts gold prices, but the effect is short-lived. If conflicts conclude quickly with limited energy market impact, gold often experiences a "buy the rumor, sell the fact" pattern, reverting to pre-conflict levels, as seen in the Gulf and Iraq wars.

If conflicts do not disrupt major energy supply routes and economic and monetary policies remain stable, gold struggles to establish a sustained uptrend. Only when accompanied by long-term structural shifts—such as de-dollarization, persistent central bank gold buying, or monetary system restructuring—does gold enter a prolonged bull market, as observed after the 2023 Israeli-Palestinian conflict.

The current Middle East conflict is now priced as a prolonged standoff. Initial liquidity pressures and interest rate headwinds have overshadowed safe-haven premiums, consistent with historical patterns where gold initially dips before rallying in high-volatility environments. Over the medium to long term, de-dollarization and central bank accumulation trends remain intact; once stagflation becomes the dominant market theme, precious metals are poised for a rebound.

In the second quarter, precious metals are expected to undergo a forward pricing cycle characterized first by "inflation" pressures, then "stagnation" concerns—initially facing headwinds before rebounding later, with gold clearly outperforming silver.

Currently, markets are pricing in the bearish impact of "inflation": rising energy costs fuel inflation, delaying expectations of rate cuts, and high real interest rates suppress precious metal valuations. As inflation permeates the economy, weakening consumption and employment will raise "stagnation" concerns, leading markets to gradually price in a stagflation scenario.

In a stagflation environment, the Fed faces a policy dilemma, real interest rates tend to decline, and gold's monetary and inflation-hedging qualities stand out, making it a preferred asset. Silver, with its significant industrial exposure, has limited upside amid economic softness and subdued risk appetite. Accelerated "silver reduction" in photovoltaic technology further weakens industrial demand support, causing silver to underperform gold.

Long-term supportive factors for precious metals remain unchanged: declining confidence in the US dollar, continued central bank gold accumulation, and inventory constraints due to safe-haven and investment demand. Once geopolitical tensions ease and the Fed provides clearer guidance on interest rates, a recovery in rate-cut expectations will likely drive the next precious metals rally.

Core long-term drivers for precious metals have not shifted significantly: de-dollarization continues, central bank gold buying persists, and fiscal monetization shows no signs of abating. These factors underpin gold's long-term upward trend.