How to understand this week's sharp decline in precious metals?

Report Summary

1. How to interpret the sharp decline in precious metals this week?

Recently, the inverse correlation between gold and crude oil prices has increased significantly. Crude oil has risen sharply this week, while precious metals have fallen sharply. Generally, rising oil prices tend to be bullish for gold through two channels: first, increased safe-haven demand due to escalating geopolitical conflicts; second, rising energy prices boost inflation expectations, enhancing gold’s inflation-hedging value. Therefore, oil prices and gold often show a certain degree of positive correlation, especially after inflation expectations rise, increasing demand for gold allocation.

However, market performance this round indicates that gold’s pricing logic is undergoing a phased shift. After continuous price increases over the past year, gold’s asset attribute has gradually evolved from a “safe-haven asset” to a “traded risk asset.” On one hand, expectations of global liquidity easing, central bank gold purchases, and resonance of geopolitical risks have driven substantial gains in gold prices; on the other hand, persistent capital inflows have made the trading structure of gold more crowded, significantly increasing its sensitivity to marginal liquidity. In this context, gold is no longer driven solely by fundamentals but more influenced by liquidity and trading structure.

2. Rising concerns over prolonged conflicts, decreasing risk-reward of crude oil

This week, energy prices, especially forward crude oil prices, rose markedly, reflecting a market consensus on the expectation of prolonged conflicts. In short-term trading, capital has rapidly concentrated into oil-sensitive assets, leading to overcrowding and low risk-reward ratio. The core disturbance this week still stems from the ongoing escalation of US-Iran tensions, which has re-priced geopolitical risks. Since the conflict intensified, sectors like shipping, ports, and coal chemicals have experienced rapid, staged gains, with their fluctuations highly synchronized with oil price movements and geopolitical developments. These main themes are essentially short-term event plays with high volatility. Currently, the market’s expectation of prolonged conflict has largely been priced in, and the marginal benefit of betting on further escalation is decreasing. If geopolitical risks marginally ease or trading enthusiasm wanes, profits may quickly reverse, especially given the crowded trading in some sectors, leading to amplified volatility.

3. Long-term geopolitical conflict, which sectors in A-shares may continue to benefit?

The structural changes driven by the mid- to long-term upward shift in the oil price center have not been fully priced in by the market: first, the external demand logic of the new energy industry chain may continue to strengthen. After the Russia-Ukraine conflict, energy security became a core constraint in European policy. The EU proposed the REPowerEU plan to accelerate energy transition through energy savings, diversification, renewable development, and reforms, aiming to reduce dependence on Russian fossil fuels by 2027. Under this background, China’s exports of new energy products to Europe have increased significantly, with rapid growth in components, inverters, and energy storage systems, supporting industry prosperity over the past two years.

If the US-Iran conflict persists, the global energy system’s “decarbonization dependence” trend may further intensify, with countries seeking rebalancing between energy security and energy transition. New energy investments are expected to be a long-term, certain direction. From marginal changes, energy storage sectors have shown notable movements this Friday, indicating some capital is already pre-positioning.

Additionally, electricity may become a bottleneck for AI development, opening new demand space for the new energy chain. To quickly meet the power demand gaps brought by AI and other emerging industries, renewables are almost the only choice. Demand in photovoltaic, energy storage, power electronics, and third-generation semiconductors will far exceed expectations in the AI era.

From a longer cycle perspective, geopolitical turbulence may have evolved from a temporary shock to a structural trend. Over the past few years, major economies have continuously increased military spending as a share of GDP, with significant hikes in Europe, Japan, and the US. This backdrop suggests a new expansion cycle driven by “security first,” where the focus shifts from efficiency to supply chain security and industrial autonomy.

This shift will have two main impacts: first, the demand center for upstream resources will rise, supported by increased demand for non-ferrous metals in military, energy, and manufacturing expansion; second, midstream equipment manufacturing demand will also increase, benefiting sectors like engineering machinery and power equipment amid global infrastructure and manufacturing capacity restructuring. For China, with a complete industrial system and cost advantages, it remains highly competitive in global manufacturing re-layouts, and the external demand center for related industries is expected to rise.

4. Investment recommendations

In the short term, it is advisable to reduce exposure to “conflict trading” sectors such as shipping, ports, and coal chemicals, as these sectors are already overcrowded, and the market has largely priced in the long-term conflict expectations, reducing the risk-reward of further bets on escalation.

In the medium to long term, focus on two main themes:

1. Under the backdrop of energy security and expanding electricity demand (driven by AI computing power), external demand for new energy industries such as photovoltaics, energy storage, and power equipment is expected to continue rising.
2. Geopolitical turbulence is pushing global manufacturing toward “security-first” restructuring, with demand centers for non-ferrous metals, engineering machinery, and high-end equipment likely to shift upward systematically, offering more long-term allocation value.

Risk warning: Excessively tight global liquidity, market complexity surpassing expectations, and policy change uncertainties.

Main Text

01 How to understand the sharp decline in precious metals this week?

The US-Iran conflict persists, and crude oil prices are rising. On March 19, Iran’s armed forces’ Hatham Anbia Central Command spokesperson stated that attacking Iran’s energy infrastructure would be a serious mistake, and Iran’s counterattack is ongoing and not over. If similar incidents occur again, Iran will launch further attacks on US, Israel, and allied energy infrastructure until they are completely destroyed, with a much stronger counterattack than before. On Thursday, Brent crude oil prices surged, briefly exceeding $110/barrel.

Meanwhile, the inverse correlation between gold and crude oil prices has sharply increased recently, with precious metals falling significantly this week. On Wednesday and Thursday, oil prices rose rapidly while precious metals prices declined sharply. The two major global asset classes show a clear negative correlation, which contradicts the normal gold pricing logic: typically, rising oil prices are bullish for gold via two channels: increased safe-haven demand due to escalating conflicts, and rising energy prices boosting inflation expectations, thereby increasing gold’s inflation-hedging appeal. Hence, oil and gold often show some degree of positive correlation, especially after inflation expectatio