How the Middle East war has taken the shine off gold

Many retail investors in Thailand have been caught unawares by the sudden phenomenon of fast-rising oil prices and the sharp drop in gold bar prices.

Gold prices had been rising rapidly since last year, but the US-Israel war with Iran that started on February 28 has reversed the trend, leading to a double-digit percentage decline in the value of the precious metal.

As on early Friday (March 27) in Asian markets, gold had recovered slightly after the sharp drop the previous day, hovering at around $4,400 per ounce.

Since the war began nearly a month ago, gold has fallen almost 17 per cent, moving largely in tandem with stocks and in an inverse relationship with oil.

Spiking energy prices have raised the risk of inflation and led investors to bet that central banks will keep interest rates unchanged, or even hike them.

“That’s a headwind for non-yielding bullion,” Bloombergreported on March 27.

In the Thai market, the price of gold peaked at over 80,000 baht per baht weight (15.244 grams) early this year, but as of March 27 it was staying at around 70,000 baht. Gold prices have been subject to widely volatile ups and downs recently.

Why gold price is falling

Some international and local analysts, including Nada Chunsom, a prominent finance economist at the National Institute of Development Administration, have cited the uncertainty of peace talks between the US and Iran as a key reason for the market turbulence.

The inability to resolve the conflict and reopen the vital Strait of Hormuz for oil and natural gas transportation has left investors uneasy. As the two rivals give conflicting signals—US officials say talks are ongoing, but Iran insists no talks are happening—volatility persists.

Before the war, gold was supported by concerns over geopolitics as the world order shifted toward fragmentation; for example, US and China tensions increased.

This led central banks worldwide to buy more gold to boost international reserves and reduce holdings of US dollars and US Treasuries.

Worries about high public debt in developed countries such as the US and Japan also encouraged investors to reduce their currency and government bond holdings in favor of gold.

Concerns about the independence of the US Federal Reserve, especially with Trump’s attempts to intervene, also made gold more appealing.

“A weakening central bank usually comes with high inflation that erodes the value of currencies such as the dollar,” Nada explained.

However, when the Iran war broke out, these trends reversed. The dollar has strengthened, and many now prefer to hold dollars and sell gold for cash, according to some international analysts.

The previous rise in gold prices also encouraged profit-taking. Rising energy prices have pushed some investors to shift money from gold to the energy sector. Highly volatile stock markets, subject to sell-offs, have led to margin calls, forcing investors to sell gold to cover positions elsewhere.

Gold’s popularity among Thais

Gold is popular among Thais, as it traditionally represents wealth, plays a key role in wedding ceremonies, and serves as a high-value gift.

In modern times, a large number of Thais have been buying gold for investment purposes, especially as online applications for trading gold have become widespread.

“I always recommend that Thai investors apply dollar cost averaging as an investment strategy, and avoid panicking,” says Nada, referring to buying gold or other investment assets gradually at regular intervals.

An expert overview

Kobsidthi Silpachai, head of Capital Markets Research at Kasikornbank, answered questions about why gold prices are falling, why the US dollar is getting stronger, and why financial markets are unstable as the war with Iran continues:

Why is the US dollar now more attractive than gold?

“Many people used to buy gold and sell US dollars. But now, the US Federal Reserve says it may not make borrowing money as easy as before. This is because of the war in the Middle East and higher prices. So, people are now buying more US dollars and selling gold.”

Does war stop people from selling currencies and bonds?

“No, war can worsen this situation. When there is war, governments spend more money and may collect less tax because the economy slows down. This means countries take on more debt, which makes their money and bonds less valuable.”

Why did the price of gold fall suddenly?

“This is mainly because people are selling gold and buying US dollars, as explained above.”

Will the Thai baht get weaker?

“The market is hoping for peace talks. There is a 28 per cent chance that the US dollar to Thai baht exchange rate will go higher than 33.00 per dollar within one month, but only a 9 per cent chance it will go higher than 34.00.”

Is it best to keep money in cash?

“Yes, when markets are very uncertain, it is safest to hold your money in cash.”