$10.8 billion could already be out of the market! After gold’s “high-diving plunge,” does its safe-haven function still hold?

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Source: Jin Ten Data

This heart-stopping wave of selling has shattered gold’s “safe-haven myth,” leaving many investors stunned. With Trump’s daily “talking-in-the-news,” where will gold’s fate go from here?

Since the outbreak of the Iran War, the price of gold has plunged by nearly 15%. In this startling market rout, people have begun to question the long-standing “safe-haven asset” status of this precious metal.

Gold is typically seen as the winner in times of geopolitical turmoil. During the first 10 days after the conflict in the Middle East broke out, even though both the stock market and the bond market were hit by large-scale sell-offs, the gold price still basically held at pre-war levels.

But afterward, as the war completely threw markets into chaos, this precious metal was pulled into the vortex of turbulence as well. Because investors urgently needed to raise funds to cover losses in other areas, they cashed out their holdings of gold, putting the brakes on the metal’s more-than-steady surge over the past two years.

Rhona O’Connell, an analyst at the financial services firm StoneX, said investors should not “fall into the trap of ‘safe haven.’” She added, “When the stock market and U.S. Treasuries crash, the gold price will almost inevitably fall too, because investors need to liquidate it to raise cash.”

Jason Turner of Germany’s private bank Berenberg said that data from hedge funds and brokers indicate that financial institutions have been “liquidating profitable gold positions to meet margin calls in the stock and bond markets.”

Vanda, a data research firm, estimates that since the outbreak of the war, global gold ETFs have suffered about $10.8 billion in net outflows.

A common speculation among analysts is that central banks of various countries may consider selling part of their gold reserves to raise funds, although this has not yet been reflected in official data.

This month, the governor of the Polish central bank has considered selling or revaluing part of its gold reserves to pay for defense spending. HSBC analysts noted that the potential gains brought by high oil prices, geopolitical risks, and still-firm gold prices “may prompt official institutions to sell even more.”

Since the beginning of 2024, as investors rushed in, gold prices have set new highs one after another, reaching a record peak of $5,594 per troy ounce in January. But after a brief drop and rebound in February, this rally began to sharply reverse starting in mid-March.

Since the U.S. and Israel began bombing Iran on February 28, the gold price fell as much as 16%, wiping out most of the gains for the year so far. After U.S. President Donald Trump hinted on Monday that the war could end soon, gold prices had already returned above the 4,500 level on Wednesday, despite the sell-off wave in March—though this still places the price at a historically high level.

John Reade, a market strategist at the World Gold Council, said that due to this conflict, the market has seen “large-scale profit-taking, risk reduction, and deleveraging.”

He added that because speculative investors have gradually come to dominate the space last year, rather than other traditional demand drivers such as the jewelry industry, gold prices have become more volatile—and this is likely to continue.

“Due to the extreme volatility over the past few weeks, gold’s role as a portfolio diversification tool and a risk-mitigating instrument has been, to some extent, weakened,” Reade said.

Analysts said that as central banks around the world try to curb the inflation shock caused by the war, market expectations for interest-rate hikes have also, to a certain extent, weighed on gold prices.

Adrian Ash, head of research at the online trading platform BullionVault, said: “Gold and silver are extremely sensitive to interest-rate expectations. Everyone is asking, ‘When will gold again be linked to real interest rates?’ The answer is: now.”

Continuously rising interest rates have pushed up bond yields, making bonds more attractive to some investors than gold, which does not generate interest.

Many analysts expect that even if Trump ends the war early as he has promised, gold’s volatility will remain elevated, and the economic damage caused by the conflict will persist.

However, some also expect that despite the war’s aftershocks continuing, gold may still regain an upward trend.

On Tuesday, analysts at the Bank of Montreal (BMO) said they expect that “once risk appetite returns,” gold will recoup “most” of the losses it suffered during the conflict.

Ash at BullionVault pointed out that in the initial “shock and panic phase” of the 2008 financial crisis, gold also fell. But afterward, it saw a strong rebound. People “view gold as the perfect asset to deal with the financial crisis, and in the long run, it indeed delivered.”

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