26.03.202609:32 Forex Analysis & Reviews: Why Is Gold Falling When the War in the Middle East Is Just Escalating?

The price of gold has resumed its decline after a moderate two-day recovery, as traders reevaluate the conflicting statements from the US and Iran regarding peace negotiations in the Middle East.

Yesterday, the price of gold held around $4500 per ounce until the White House announced that negotiations with Iran were progressing productively and had prepared a 15-point peace proposal. However, Tehran publicly rejected the US proposals for ending the conflict yesterday and put forward its own conditions, which quickly renewed pressure on gold prices.

Why does gold fall in a situation where the risk of escalating military conflict is rising? The answer is simple: the sharp rise in energy prices, which is likely to continue since, even while continuing diplomatic negotiations, the US has sent thousands of troops to the region for a ground invasion, leads to a significant increase in inflationary pressure worldwide, forcing central banks, including the Fed, to actively raise interest rates. High interest rates always negatively affect gold prices, making it a less attractive asset.

Since the beginning of the war, which has lasted almost a month, the price of gold has fallen nearly 15%, typically moving in tandem with stocks and inversely to oil. The sharp rise in energy prices has heightened inflation risk and led investors to bet that central banks will keep interest rates unchanged or raise them. As I mentioned above, this creates obstacles for non-yielding precious metals.

The prospect of a Federal Reserve interest rate hike may be tempered by the risk of an economic downturn in the US due to a prolonged war. Many economists are already lowering their forecasts for the US economy this year while raising inflation and unemployment forecasts, thus increasing the likelihood of a recession.

According to data, about 85 tons of gold have been purchased from exchange-traded funds since the war began. Even at $4500 per ounce, another 83 tons remain unprofitable and therefore vulnerable to liquidation.

As for the current technical picture of gold, buyers need to reclaim the nearest resistance at $4481. This will enable targeting $4531, above which it will be quite difficult to break through. The farthest target will be around $4591. In the case of a decline in gold prices, bears will attempt to take control of $4432. Should this succeed, breaking through this range will deliver a serious blow to bullish positions and push gold down to a low of $4372, with a prospect of falling to $4304.