Gold prices plunged sharply after US President Donald Trump termed Iran's latest peace proposal to end the war in the Middle East as "absolutely unacceptable." However, part of the Asian decline has been slightly recovered at the current moment.

It is clear that the failure of diplomacy not only prolongs the conflict but also intensifies inflation fears, putting pressure on the precious metal that does not generate interest income. In morning trading on Monday, the price of gold neared $4,651 per ounce, down approximately 1.1% from the previous close. This decline followed a nearly 2% increase in the metal's price last week.

Why is Gold Falling When the World is on the Brink of New Escalation?

It seems that rising geopolitical tension should push gold prices higher. However, the current situation is paradoxical. The collapse of negotiations effectively keeps inflation risks high. High inflation, in turn, forces the US Federal Reserve to keep interest rates elevated. And rates are the primary enemy of gold, which does not pay a dividend. Investors find it more profitable to hold dollars or bonds to earn interest from them.

By rejecting the latest proposal, Trump makes it clear that his priority is to curb Iran's nuclear ambitions. This suggests either further escalation in the Middle East or, at best, a prolonged negotiation process.

Without new shocks, gold prices are likely to continue demonstrating sideways consolidation, as markets remain caught between geopolitical tension and rising inflation fears. This combination is likely to result in the metal lacking a clear direction despite high volatility in global markets.

The situation on the ground is not calm. Attacks in the Middle East over the weekend underscored the fragility of the ceasefire that took effect on April 8. On Sunday, a cargo vessel off the coast of Qatar in the Persian Gulf was attacked by a drone, leading to a brief fire. The United Arab Emirates and Kuwait also reported intercepting hostile drones in their airspace. This backdrop leaves little hope for a swift diplomatic resolution to the conflict.

Given the current technical picture, gold buyers need to reclaim the nearest resistance at $4,708. This will allow them to target $4,771, above which it will be quite challenging to break through. The further target will be around $4,835. In the event of a decline in gold, bears will attempt to take control of $4,656. If they succeed, a breakout of the range will deliver a serious blow to bullish positions and push gold down to a low of $4,607, with the potential to reach $4,546.