Explained: Why gold prices remain subdued despite West Asia tensions

Gold prices have remained unexpectedly weak even as geopolitical tensions in West Asia intensify—a stark contrast to gold’s traditional reputation as a safe-haven asset during global crises. Since 01 March, international gold prices have dropped nearly 13%, while domestic prices in India have fallen about 10%. Silver has corrected even more sharply, with global prices down 25% and domestic prices lower by 21%. This unusual divergence between rising geopolitical risk and falling precious metal prices highlights deeper macroeconomic forces at play. It also raises the question: Is this merely a short-term consolidation, or does it signal a structural shift in investor behaviour?Strong U.S. Dollar Limits Safe-Haven GainsOne of the biggest factors suppressing gold is the renewed strength of the U.S. dollar. During periods of geopolitical stress, global investors flock not only to gold but also to the dollar, which offers superior liquidity and global acceptance.The U.S. Dollar Index (DXY) has risen sharply from around 97 in mid-February to 100.15 by mid-March, reflecting strong safe-haven flows into the greenback. Since gold is dollar-priced, a stronger USD makes bullion costlier for other currency holders, dampening investment and physical demand. As a result, the usual geopolitical boost for gold has been overshadowed by the dollar’s resurgence.Rising U.S. Treasury Yields and Higher Oil Prices Pressure BullionGold has also faced pressure from rising U.S. Treasury yields. Higher yields increase the opportunity cost of holding non-yielding assets like gold, making government bonds more attractive in comparison. At the same time, surging oil prices amid the Iran–Middle East conflict have intensified inflation worries. Investors now expect central banks, especially the U.S. Federal Reserve, to keep interest rates elevated for longer. This environment strengthens yield-bearing assets and weakens gold’s appeal, even during geopolitical upheavals.Overvaluation and Heavy Profit-TakingGold had already staged a robust rally before the West Asia conflict erupted. After such a steep climb, the metal entered what many considered overvalued territory. Investors were reluctant to increase their exposure at elevated levels. When volatility spiked after the conflict intensified, traders seized the opportunity to book profits, leading to liquidation pressure instead of the typical safe-haven inflows. Markets tend to react this way after extended rallies, where investors prefer locking in gains rather than adding fresh positions. This wave of profit-taking diluted the potential upside from geopolitical tensions.Liquidity-Driven Selling and Geopolitical Risk Already Priced InDuring periods of sharp market stress, investors often prioritise liquidity above all else. Gold, being one of the most liquid assets globally, frequently becomes a source of cash to cover losses, meet margin calls, or rebalance portfolios. This liquidity-driven selling has been a key factor in the recent correction, overpowering safe-haven demand. Additionally, much of the geopolitical premium was already factored in gold prices at the start of 2026. Earlier conflicts, global recession fears, and currency volatility had kept gold elevated. With markets already positioned for ongoing instability and upcoming U.S. political developments, fresh upside triggers were limited.Shift in Interest Rate Expectations and Overbought TechnicalsExpectations around future U.S. interest rates have also influenced gold’s trajectory. Speculation surrounding potential changes in Federal Reserve leadership and delays in rate cuts have kept real yields high, reducing gold’s relative attractiveness.On the technical front, both gold and silver were significantly overbought, which was reflected in elevated RSI readings. This indicated stretched speculative positioning and increased vulnerability to corrections. Traders took advantage of these technical signals to unwind bullish positions, adding to the downside pressure.Why Indian Gold Prices Stayed Steady Despite a Weak RupeeDespite the Indian rupee weakening to record lows, an event that typically pushes domestic gold prices higher by increasing import costs, gold prices in India have remained relatively steady. This unusual trend is largely due to the sharp decline in international gold prices, which has offset the higher landed cost caused by currency depreciation. At the same time, domestic demand has been subdued, as months of elevated prices have dampened jewellery buying and kept household budgets under pressure. Importers have also adopted a cautious stance, avoiding aggressive purchases amid volatile global conditions. These factors have prevented domestic prices from rising in proportion to the rupee’s weakness.Outlook: Choppy Near Term, Constructive Long TermLooking ahead, bullion is expected to remain choppy in the near term, with strong U.S. dollar conditions, elevated real yields, and uncertainty surrounding the Federal Reserve’s policy outlook likely to dominate price movement. Periodic bouts of liquidity-driven selling may add to short-term volatility, keeping gold and silver rangebound. However, the long-term outlook for precious metals remains constructive. Persistent geopolitical fragmentation, ongoing central bank diversification away from major reserve currencies, underlying inflation risks, and tightening supply, particularly in silver, continue to support a favourable multi-year outlook for precious metals. As global growth moderates and monetary authorities eventually shift toward easing cycles, both gold and silver are poised to strengthen their roles as strategic hedges. With structural demand remaining firm and supply constraints becoming more pronounced, the long-term upside potential for both metals appears increasingly compelling.(The author of the article is Hareesh V, Head of Commodity Research, Geojit Investments Limited)