Are falling precious metal prices providing a buying opportunity?

The escalation of Middle East tensions has heightened inflation expectations, disrupted energy supply chains, driven up military spending, and deepened geopolitical uncertainties. This should have created a favorable environment for safe-haven assets like precious metals. Instead, since the outbreak of conflict on February 28, prices for gold, silver, platinum, and palladium have plummeted, continuing the downward trend that began in the last week of January. So, what has driven this decline, and what does the future hold?

Inflation Concerns Have Boosted Precious Metal Prices Over the Past Year
Multiple factors have contributed to the rise in precious metal prices from early 2025 to late January 2026, but fundamentally, it all boils down to concerns about inflation. Factors fueling inflation expectations include:
1. Core inflation above target levels: Even before the conflict erupted, most major economies had inflation levels exceeding their central banks’ targets after excluding volatile food and energy prices.
2. Monetary policy easing: Despite widespread core inflation above target, nearly all major central banks have been cutting interest rates.
3. Large fiscal deficits: Many countries have unusually high budget deficits relative to GDP, including Brazil (8.5%), France (5.5%), Mexico (4%), the UK (4.5%), and the US (5.5%). Meanwhile, countries like Germany and Japan are preparing to significantly increase infrastructure and military spending, further expanding deficits.
4. Concerns over central bank independence: Against the backdrop of inflation above target, easing monetary policy, and large budget deficits, investors are increasingly worried that central banks may be pressured to fund deficits through accommodative policies.
5. Geopolitical uncertainties: Rising trade barriers, reshoring of supply chains, nearshoring trends, potential conflicts in the Middle East and Pacific regions, combined with ongoing Russia-Ukraine tensions, have prompted investors to allocate assets to precious metals for diversification.

However, this situation began to change in January when Kevin Warsh was nominated to become Federal Reserve Chair in mid-May. Markets believe he may adopt an independent stance on monetary policy and has long opposed or at least been cautious about quantitative easing, which involves central banks injecting liquidity into the economy by purchasing government bonds and financial assets. As concerns about the Fed’s independence eased, precious metal prices declined sharply. Yet, by the end of February, before the Middle East conflict erupted, prices had already started to rebound.

The conflict proved detrimental to gold, especially impacting palladium, platinum, and silver more significantly. To some extent, this seems contradictory. Consumer fuel prices like gasoline and diesel have risen sharply. According to AAA, U.S. consumers are paying nearly $1 more per gallon of gasoline compared to February, and diesel (and heating oil) are up by over $1.50. Given that gasoline and other fuels account for about 3% of the Consumer Price Index (CPI), if fuel prices remain at current levels, they could push overall U.S. inflation up by as much as 1 percentage point in the coming months.

Additionally, price increases in other regions globally could be even more pronounced. For example, Brent crude oil futures on NYMEX last trading day are trading at $15 above WTI crude, and Oman crude on GME is over $60 above WTI. This indicates that Europe and Asia may face more severe energy inflation shocks than the U.S.

Expectations to Buy, Facts to Sell
In the short term, rising inflation is not good news for precious metals. The reason is simple: central banks are beginning to shift gears and consider rate hikes. The Bank of England has hinted at possible up to three rate increases, and the European Central Bank has warned of potential rate hikes as well. Although the Fed still expects to cut rates by 25 basis points after the March meeting and has not fully priced in further cuts in 2026 and 2027, market futures for federal funds rates have largely discounted the possibility of additional easing. Compared to investors still expecting significant rate cuts, the prospect of fewer cuts or even rate hikes makes holding fiat currency more attractive than precious metals.

In some ways, the performance of precious metals in 2025-2026 resembles the trends from 2019-2023. From early 2019 to mid-2020, as market expectations for Fed rate hikes were lowered and the Fed ultimately cut rates to zero during the early pandemic, gold prices soared. Then, from 2021 to 2023, as inflation rose and central banks had to implement the largest rate-tightening cycle since the late 1970s, gold prices fell from $2100 to $1600. This is a classic “buy the rumor, sell the fact” scenario. Gold and silver accurately anticipated inflation rising in 2019 and 2020, but when inflation actually materialized, at least in the short term, it was bearish for them because precious metals tend to have a negative correlation with interest rate expectations.

From late 2024 to early 2026, the U.S. dollar generally weakened, which also supported gold and other precious metals, as they tend to move inversely to the Bloomberg U.S. Dollar Index daily. However, since the Middle East conflict erupted, the dollar has exhibited “safe-haven” characteristics, strengthening relative to most other currencies and putting pressure on precious metals. Meanwhile, the overall market has shown a de-risking trend, with stocks, cryptocurrencies, and other risk assets experiencing slight declines so far.

Outlook
Many fundamental factors driving precious metal prices higher still exist. Most importantly, no major economy has taken measures to curb budget deficits. Additionally, this conflict may lead many countries to further increase military spending to adapt to the rapidly changing landscape. In fact, even before the conflict, the U.S. government proposed a 50% increase or $500 billion annually in defense spending, and recently requested $200 billion in additional funds to replenish depleted munitions stocks.

On the central bank front, some may follow the Reserve Bank of Australia’s shift toward tighter monetary policy, but the tightening is expected to be significantly less aggressive than in 2022 and 2023. In fact, some central banks, including the Bank of Japan, have delayed rate hikes due to concerns that rising oil prices could slow economic growth. As interest rates peak and market expectations shift toward easing, precious metals like gold are beginning to break out of the consolidation range seen from 2020 to 2023. Looking ahead, as investors reprice the likelihood of central banks restarting easing policies, precious metal prices could see a new rally, especially if core inflation remains above target levels.