After the major earthquake, can gold still reach new highs? (Guojin Macro Chen Hanxue)

The United States’ prolonged military engagement in the Middle East is the fourth depletion of dollar credibility. When the market begins to price in losing the Middle East war, it signals that the United States’ comprehensive national strength is shifting from prosperity to decline, and gold will climb to the next peak.

Text: Guojin Macro Song Xuetao / Contact: Chen Hanyu

1. The rate hike trade bursts the speculative bubble in gold

Since March, gold prices have rapidly retreated, inevitably reminding the market of the “Wash Trade” at the end of January, but the January adjustment was due to high crowdedness amid expectations of balance sheet reduction, leading to concentrated liquidations. Before this round of sharp gold price correction, implied volatility had already moved away from extreme highs (Chart 1), with macro variables becoming the dominant factor.

This round of gold price adjustment initially stemmed from the outbreak of the US-Iran war, with oil and the dollar surging sharply, triggering liquidity tightening expectations. As the world’s largest oil producer and net exporter, rising oil prices passively increased the dollar’s premium against non-US currencies. Meanwhile, risk-averse demand from Middle Eastern and Asian markets also tightened offshore dollar liquidity. Subsequently, sustained high oil prices raised concerns about imported inflation, prompting revisions in central bank and futures market interest rate expectations. By March 23, the overnight swap market began pricing in the Fed raising interest rates by 0.8 times this year, and the Bank of England, Eurozone, Canada, and Australia’s central banks were expected to hike rates 2.4, 2.2, 3.8, and 3.1 times respectively (Chart 4). The rise in US Treasury yields caused speculators in gold to withdraw quickly (Charts 2, 3).

2. Caution in the short term, waiting for volatility to stabilize

In the short term, most technical indicators for gold show oversold conditions, but reversal trends are still unclear. As of March 23, the London Gold RSI had fallen to an extreme value of 21.1 (Chart 6), but no bottom divergence signals appeared; the K, D, J values were 13.6, 16.0, 8.7 respectively, still lacking a golden cross signal (Chart 5); prices continued to probe below the Bollinger lower band, and the bands widened, possibly indicating the start of a new trend (Chart 7).

From the perspective of absolute volatility levels, gold remains in a “high volatility” environment. Even though prices have already fallen sharply, realizing much of the volatility expectations (IV-HV decreased), implied volatility (IV) continues to rise (Chart 8), indicating that options investors are increasingly uncertain about future price paths, and the market still needs further digestion.

Crowdedness and the gold-oil ratio both show that gold has already overshot in the short term. As of March 23, short-term and medium-term trading crowdedness for gold were 0% and 21.5% respectively (Chart 9). On the same day, the gold-oil ratio had fallen back to 41, reaching the level of the first sharp correction in August 2020, close to the long-term median (Chart 10).

From an cross-asset perspective, if gold can continue to reduce volatility, it will regain its safe-haven advantage. Since March, not only gold but also major asset classes have been playing out stagflation trades, with stock and bond volatilities rising (Chart 11), highlighting the importance of cash assets. Notably, cryptocurrencies—assets highly sensitive to liquidity and historically volatile—have fallen less this round, possibly because they experienced a prior decline, releasing valuation pressures early. After a period of decreasing volatility, gold may also regain its “relative safety.”

Below 4,500 points, 4,300 is the starting point for this year’s phase of gold and silver rally, with the 3,900-4,000 range serving as both a psychological milestone and the 250-day moving average, as well as a support level during last October’s gold correction (Chart 12). Falling below 3,900, the 3,400-3,500 range marks the beginning of Powell’s shift in monetary policy last August and the start of this round’s main upward wave in gold.

3. Recession trade may be the starting point for gold’s rebound

Based on experiences from the two oil crises in the 1970s, when the economy entered stagflation (high CPI growth + high unemployment), gold generally trended upward even with policy rate hikes (Chart 13). Data from the World Gold Council also shows that when market stagflation expectations rise, demand for gold remains positive on average (Chart 14). This round of market expectations was sharply revised upward, with prices “rising” in the short term, but overlooked the pressure of “stagnation,” leading to a significant phase of retracement in gold.

However, it is also important to note that the US economy is currently showing signs of weakness, with high oil prices potentially accelerating recession. Unlike the stagflation environment of 2020-2021, when the US responded to the pandemic with massive fiscal and monetary stimulus, accumulating excess private sector purchasing power, this time, the combination of the Russia-Ukraine conflict and supply-side and demand-side factors has driven inflation higher, creating stronger rate hike expectations.

Today, despite support from AI-related investments, the pain felt by lower- and middle-income residents cannot be masked by AI investments. In January, US private durable goods consumption growth slowed to 1% (Charts 15, 16). In the first three quarters of 2025, AI-related industries contributed 37% to real GDP growth, higher than the same period in 2024, when real GDP grew by 2.1%, but excluding AI’s contribution, growth was only 1.5%.

The employment market also faces greater downside risks. In March 2022, each unemployed person in the US was matched with 2.03 job openings; now, that ratio has fallen below 1 (Chart 17), and the unemployment rate is nearly one point higher than in 2022. From June 2022 to present, monthly non-farm employment increased by an average of 377k, but since then, it has decreased by about 3,600 per month (Chart 18). Additionally, the risk of layoffs in low-skilled jobs that AI can replace persists.

It can be said that before the US-Iran war, the US economy was already showing signs of “stagnation.” In this context, high oil prices trigger supply shocks, raising costs in transportation and logistics, squeezing corporate profits, causing factory shutdowns, and increasing unemployment, which could further reduce household purchasing power and hasten recession.

Under this scenario, even if oil prices remain high, the Fed may reassess recession risks and consider the need for additional liquidity. Facing dual headwinds of economic stagnation and declining capital markets, the Fed might reconsider rate cuts or balance sheet expansion to stabilize the economy. This liquidity expectation gap caused by recession could lure some speculative gold investors back into the market.

4. The Middle East war marks the decline of US comprehensive strength, brewing a new bull market for gold

The US-Iran war has not ended in the short term and may even become prolonged, which is unfavorable to dollar credibility.

First, in terms of US influence, response from NATO members and others has been very limited, and the US, facing an opponent under forty years of sanctions, has not demonstrated overwhelming military superiority, even suffering asymmetric strikes and depletion in some areas. In the short term, Trump failed to achieve the military goal of overthrowing the Iranian regime nor effectively protected its Gulf allies, and found itself in a dilemma. If the US cannot win convincingly, it would be a defeat; the US would lose part of its Middle East influence and the dollar hegemony built on military strength.

Second, Iran’s countermeasures—such as blocking the Strait of Hormuz—could, in the long run, undermine the “oil-dollar” chain. Over decades, Gulf states have exported oil through the Strait, earning dollars that they then invested in US stocks and dollar assets. This chain now faces unprecedented uncertainty. If the US cannot control the Strait or otherwise regain pricing power over oil, the attractiveness of dollar assets to Middle Eastern funds will decline.

Third, rising interest rates hinder the key issue of Trump’s second term—debt monetization. As of late February 2026, the average interest cost on US long-term debt was 3.38%, up 0.14 percentage points from a year earlier, with the lagged effects of high rates still evident. If the US increases military spending due to the war, accelerating fiscal disorder, the dollar’s credibility will inevitably be priced in by the market.

A new story favorable to gold will emerge. The short-term bubble of speculative liquidity in gold will clear, making future gains safer. The pricing of dollar credibility often requires catalysts—such as the February 2022 “technical default” on Russia, the November 2024 “Hail Mary debt framework,” or the April 2025 “tit-for-tat tariffs.” This prolonged US military engagement in the Middle East is the fourth depletion of dollar credibility. When the market begins to price in losing the Middle East war as a sign of US decline, gold will climb to the next high.

Risk warning

Geopolitical risks exceeding expectations, continued Iranian blockade of the Strait of Hormuz, further spikes in global oil prices, or unexpected US fiscal stimulus to support employment and consumption could intensify stagflation trading; limited data availability—such as delayed central bank gold purchase data and scarce market trading data—also pose risks.

Team introduction

Song Xuetao: PhD in Economics from North Carolina State University, author of CF40 monographs, academic papers, and central bank working papers. Recognized in Golden Bull, 21st Century, Wind, Shanghai Securities News, Sina, IAMAC, Crystal Ball rankings, and No. 5 in New Fortune 2023.

Policy research:

Zhao Honghe (Master’s in Finance from Central University of Finance and Economics), responsible for major strategic policies and international relations research.

Zhang Xinyue (Master’s in Applied Economics from Renmin University of China), responsible for economic policy and fiscal research.

Macroeconomics:

Sun Yongle (Master’s in Industrial Economics from Central University of Finance and Economics), responsible for domestic macroeconomics and monetary liquidity research.

Zhong Tian (Master’s in Economics from the University of Chicago), responsible for overseas economics and global monetary policy research.

Industry research:

Li Mengying (Master’s in Regional Planning from the University of British Columbia), responsible for trade policy, corporate overseas expansion, industry trends, and macro ESG research.

Asset allocation:

Chen Hanxue (Master’s in Finance from the University of California, Riverside), responsible for overseas market analysis and major asset research.

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Report information

Securities Research Report: “Revisiting Gold After the Big Shock: From Inflation to Stagnation—Long-term Opportunities in US Power Shift”

External release date: March 25, 2026

Published by: Guojin Securities Co., Ltd.

Securities analyst: Song Xuetao

SAC license number: S1130525030001

Email: songxuetao@gjzq.com.cn

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