Gold (XAU/USD) drops sharply amid market panic, but fundamentals remain strong

By Daniela Sabin Hathorn, senior market analyst at Capital.com

Global markets opened the week under pressure, with major equity indices tumbling once again as volatility swept through the Asian session. The latest wave of selling follows China's announcement of retaliatory tariffs on the U.S., intensifying the fallout from last week's 'Liberation Day' tariff shock.

Investors had hoped that the worst of the uncertainty would fade following the initial U.S. tariff announcements. Instead, the reality has proven more severe. With tariffs exceeding expectations and no sign of negotiations, markets are now increasingly pricing in the risk of a global recession—beginning with the U.S.

This risk-off mood has triggered broad-based liquidation across asset classes. Even traditional safe havens have not been spared.

Gold Suffers in Unusual Selloff

Gold, typically a beneficiary of risk aversion, has not been immune. XAU/USD has dropped more than 6% since Thursday, a move that seems to defy its status as a hedge during times of market stress. The likely explanation: forced liquidation. As losses pile up elsewhere, investors appear to be selling profitable or liquid assets like gold to meet margin calls or reduce exposure. As a result, this selloff looks more technical and sentiment-driven than fundamental. The key factors that have supported gold remain intact:

• Rising geopolitical tensions
• Ongoing global growth concerns
• Expectations for lower interest rates
• Continued central bank demand for gold

Looking beyond the short-term panic, the medium- to long-term outlook for gold remains bullish. The current environment—marked by volatility, economic uncertainty, and central bank caution—typically favours gold.

Last week, Fed Chair Jerome Powell reaffirmed the Fed's "wait-and-see" approach in response to the unfolding instability. This week's March CPI release will be crucial. If inflation data shows further softening, it could strengthen the case for future rate cuts, potentially reigniting demand for gold. On the other hand, a surprise uptick in inflation could limit the Fed's ability to ease, injecting more uncertainty into the macro picture.

Technical View: Consolidation May Invite Fresh Buyers

On Monday morning, XAU/USD briefly dipped below the 3,000 level, but quickly found support and began stabilizing. While gold has pulled back from recent highs, the daily chart suggests there's no strong appetite for aggressive selling at current levels.

The RSI (Relative Strength Index) has reset from overbought territory, creating a more favourable technical backdrop for new buying interest—particularly from bargain hunters seeking entry at lower prices.