Gold's "Golden Pit": After reclaiming the $4,500 level, has the selling wave ended?

Under the impact of the Iran war, gold—traditionally seen as a safe-haven asset—has faced its most severe faith crisis in recent years. Dropping more than a quarter from its January high, the sharp decline has prompted the market to reevaluate the pricing logic of this asset—whether it’s a deep pit in a long-term bull run or the beginning of a bubble burst.

This week, gold prices rebounded after Trump hinted that the conflict might end sooner, briefly climbing back above the $4,500 level. However, most analysts believe the market has not yet stabilized. The reasons for this decline are clear:

The selling pressure following the Iran conflict mainly stems from investors forced to liquidate gold holdings to meet margin calls in stocks and bonds. Data firm Vanda estimates that since the conflict began, global gold ETFs have seen outflows of about $10.8 billion. Meanwhile, the war has boosted inflation expectations and lowered expectations for rate cuts, making bonds more attractive and further pressuring gold prices.

Western Securities believes that current gold pricing mainly reflects its store of value, which is negatively correlated with the US dollar’s creditworthiness. Rising oil prices and stable oil-dollar trade volumes have temporarily constrained gold’s gains. But they also suggest that, if the US fails to seize control of the Strait of Hormuz or opts for QE under liquidity pressures, the dollar’s credit could fracture further, potentially pushing gold to new highs.

The true logic behind the sell-off: not gold’s failure, but liquidity stampede

The recent 27% plunge in gold from its intraday high in January to this week’s low, with a five-day drop before Trump’s threat to strike Iran’s energy facilities, marks the worst performance since 2013.

However, many analysts point out that the main driver of this decline is not a fundamental shift in gold’s safe-haven logic but a passive liquidity stampede.

StoneX analyst Rhona O’Connell states that gold “almost inevitably falls when stocks and bonds crash,” as investors need to liquidate holdings to cover losses elsewhere. She warns investors not to fall into the trap of viewing gold solely as a “safe-haven asset.”

According to Bloomberg, Jason Turner of Berenberg Bank reports that data from hedge funds and brokers show financial institutions have been “liquidating profitable gold positions to meet margin calls in stocks and bonds.”

Charles Gave and Louis-Vincent Gave of Gavekal Research attribute this sell-off simply to gold being overbought before the conflict, with assets that are overbought typically the first to fall during market turmoil—similar to the “rapid rise and fall” pattern seen during the 1970s oil crises.

The drift in fundamentals: the decoupling of gold from real interest rates

The chaos in gold pricing was foreshadowed even before the war erupted.

From the post-2008 financial crisis until early 2022, gold prices maintained a highly stable negative correlation with US real interest rates: rising real rates pressured gold, falling real rates supported it. But according to Bloomberg, Deutsche Bank’s Tim Baker’s research shows that this relationship has nearly disappeared since 2022.

Instead, gold prices in recent years have started moving in tandem with US nominal interest rates and emerging market stocks—both risk assets that run counter to the “safe-haven” attribute.

Bloomberg notes that recent gold price movements resemble the Nasdaq index before the dot-com bubble burst in 1999-2000. Both peaked shortly after hitting certain round-number levels and experienced rapid increases of about 80% months before topping out.

In January, the World Gold Council reported record global ETF inflows, especially in Asia—similar to retail investors rushing into the market before the Nasdaq bubble burst. John Reade also states that speculative investors have gained dominance in the gold market since last year, significantly increasing volatility.

The long-term logic remains intact: the dollar’s credit cracks may be hard to reverse

Despite short-term pressure, many strategists believe the core valuation logic of gold remains valid and may even be reinforced by ongoing conflicts.

Western Securities’ report today notes that since October 2022, US long-term real interest rates have remained high, yet gold prices have continued rising, indicating that the market is pricing gold’s “reserve value” rather than “trading value.” The Russia-Ukraine conflict has accelerated the widening of the dollar’s credit cracks, prompting central banks and sovereign funds to diversify reserves.

The report suggests that the recent rise in oil prices due to US-Iran tensions temporarily restored confidence in the oil-dollar system, strengthening the dollar and suppressing gold. This mechanism caused gold to fall even more than stocks and other risk assets, creating a “misfire.”

However, if Iran maintains control of the Strait of Hormuz long-term and oil trade settled in dollars is substantially impacted, the dollar’s credit could face deeper erosion, and gold could resume its upward trajectory.

Historically, from the collapse of the Bretton Woods system in the 1970s to the second oil crisis in 1980, gold experienced nearly 20-fold gains over a decade, with prices rising 79% and 291% during the two oil crises, both with sharp mid-term fluctuations.

Federal Reserve policy variables: a new chair could be a catalyst

Another key factor influencing gold’s medium-term trend is the personnel and policy direction of the Federal Reserve.

The uncertainty surrounding Trump’s nomination of Waller as Fed chair adds to gold’s unpredictability. Bloomberg notes that new Fed chairs typically face “stress tests” from markets, needing to demonstrate their commitment to fighting inflation—meaning even if the White House pressures for rate cuts, the new chair might push for tighter policies, which would be negative for gold.

Conversely, some analysts argue that if Waller’s leadership under liquidity pressures forces the Fed to adopt QE, the resulting widening of the dollar’s credit cracks could boost gold prices.

BMO analysts stated this week that once risk appetite recovers, gold could recoup “most of the war-related losses.” Ash from BullionVault cites the 2008 financial crisis, noting that gold also declined during the “turbulent and panic” phase but later proved to be the “perfect asset for crisis management.”

Is the sell-off over? Volatility remains the biggest risk

The current consensus is that gold’s volatility will remain elevated in the foreseeable future. Whether the sell-off ends largely depends on whether overall market volatility can subside.

Gavekal analysts explicitly state that, in this crisis, gold has shown it is “not a ‘anti-fragile’ asset,” posing greater-than-expected volatility risks to portfolios. They believe the selling pressure will persist until “overall market volatility declines and companies and countries shift back from ‘just-in-case’ inventory management to ‘just-in-time’ supply chains.”

After Trump’s Monday hint that the conflict might end early, gold rebounded immediately—while oil prices remained largely unchanged, gold quickly recovered from Sunday night’s losses. This clearly shows that gold investors are highly eager for any signals that could reduce geopolitical risk premiums, and that bullish sentiment has not yet fully shattered.

For investors seeking a “buying dip,” the key question may not be whether the long-term logic of gold holds but when market volatility will truly ease from its most perilous phase.

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