Despite the outbreak of US-Iran tensions, gold prices have weakened. This phenomenon can be understood from four perspectives: (1) Historical patterns indicate that gold prices generally perform poorly after geopolitical conflicts begin, with declines being common; price increases are more frequent before conflicts erupt. (2) Gold's hedging effect against US equities is not as strong as perceived. In recent years, gold has shown a higher positive correlation with US stocks, meaning it fails to provide protection during market downturns. (3) In the short term, a strengthening US dollar and rising Treasury yields exert downward pressure on gold. (4) After a sharp rally early in the year, gold's volatility surged to historical highs, causing market sentiment to turn cautious.

Looking ahead, three factors may signal a turnaround for gold: (1) Based on the historical maximum decline after the Iran-Iraq War, gold may still have around 5% downside. (2) A stabilization in US equities, likely contingent on de-escalation of tensions, could help restore overall market sentiment. (3) A return of gold's volatility to normal levels.

On March 19, gold prices fell more than 5%, dropping below $4,600 per ounce. Since the US-Iran conflict began, gold has continued to weaken.

Gold has been one of the top-performing assets over the past year and is widely regarded as a safe-haven asset and a beneficiary of shifting global dynamics. However, since the outbreak of US-Iran tensions, gold has fallen more than 10%. How can we explain its recent weakness?

(1) Historical experience shows that gold tends to underperform after geopolitical conflicts begin, with declines being common; most of its gains occur before conflicts start. Contrary to intuition, geopolitical conflicts are not necessarily bullish for gold. A review of major Middle East-related conflicts reveals that gold prices tend to rise in the month leading up to a conflict, with an average gain of nearly 4%. However, in the three months after a conflict begins, gold's performance varies widely, with no clear upward trend and a higher probability of decline within the first month.

Examining price trends also reveals a similar pattern: gold generally trends upward before a conflict but enters a period of volatility afterward. In conflicts more closely tied to the Middle East—such as the Iraq War, the Gulf War, the Iran-Iraq War, and the Russia-Ukraine War—gold prices have often declined after the outbreak of hostilities. For example, after the Iran-Iraq War, gold fell by as much as 15%.

Two reasons may explain this: First, after a war begins, overall risk appetite declines sharply, and liquidity shocks may occur, leading to gold being sold off. Second, gold often rallies in anticipation of conflict, so the positive catalyst is already priced in by the time fighting starts.

(2) Gold's hedging effect against US equities is weaker than commonly believed. In fact, in recent years, gold has shown a positive correlation with US stocks, meaning it offers little protection during equity market declines. Historical correlation data between gold and the S&P 500 shows that the two were negatively correlated around 2013–2015. However, over the past decade, this negative correlation has largely disappeared, replaced by a positive relationship. By 2025, the correlation even approached 1. This suggests that gold does not act as a hedge during significant equity market stress. The pressure on US and global stocks after the US-Iran conflict broke out may be one reason gold has not rallied.

The underlying logic may also stem from liquidity dynamics: when equities fall, liquidity tightens, and selling gold may be used as a means to raise cash.

(3) In the short term, a stronger US dollar and higher Treasury yields are weighing on gold prices (though this may not be the primary driver). Although traditional dollar and interest rate frameworks have not fully explained gold's performance in recent years, they can still exert influence over short-term windows. Recently, the US dollar has strengthened noticeably, and Treasury yields have approached previous highs, creating a traditionally bearish environment for gold.

(4) Gold's sharp rally early in the year drove volatility to historical highs, leading to increased market caution. Gold was one of the best-performing—and most volatile—assets early in the year. Although volatility has since moderated, it remains well above late-last-year levels, indicating ongoing market uncertainty. Against the backdrop of conflict and weak risk appetite, investors may be adopting a more reserved stance toward gold.

(5) Outlook: Three factors to watch for re-entering gold positions. Since the long-term bullish narrative for gold remains intact, medium-term sentiment still favors buying. While short-term caution is warranted, investors may watch for potential entry points based on three factors: First, based on the historical maximum decline after the Iran-Iraq War, gold may still have around 5% downside. Second, stabilization in US equities, likely requiring signs of de-escalation, could help restore broader market confidence. Third, a further normalization in gold's volatility levels.

Risks include higher-than-expected US inflation and growth leading to tighter Fed policy, a stronger US dollar, rising Treasury yields, further equity declines, banking sector stress, and emerging market currency or debt crises. A worse-than-expected US recession could trigger a liquidity crisis, forcing the Fed to ease. An aggravated European energy crisis could deepen a eurozone recession, disrupt global markets, shrink external demand, and create policy dilemmas. Escalating global geopolitical risks, worsening US-China relations, supply disruptions in commodities and transportation, accelerated deglobalization, and intensified resource competition also pose threats.