After liquidity retreats from gold, it returns to fundamentals.

After liquidity retreats from gold, it returns to fundamentals.

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The gold market has undergone an epic cycle from frenzy to clearing. From September 2025 to February this year, gold prices rose steadily, repeatedly hitting new highs, until the rally halted abruptly in February and turned into a sustained decline. Currently, gold prices have fallen below $4,500/oz, about a 20% drop from the historical peak near $5,600.

CITIC Securities believes this sharp drop is not the end of the gold bull market, but a forced clearing of liquidity overpricing. Since last September, the core driver behind the surge in gold prices has been liquidity pricing. The latest US-Iran conflict triggered inflation expectations, pushing liquidity pricing logic to recede and leading to a sharp gold correction.

After the excessive liquidity pricing fades, gold will return to its "fundamentals." The fundamental drivers supporting gold remain intact. This correction washes away excess liquidity premiums, making future price movements potentially steadier and more sustainable.

In the medium to long term, three underlying logics remain unbroken: the central bank gold buying trend continues, US fiscal fragility restricts monetary policy tightening, and the petro-dollar system keeps loosening. Gold's central value will keep benefiting from the structural trend of "reserve diversification."

US-Iran Conflict Triggers Liquidity Crisis: This Time, the Geopolitical Relationship with Gold Is "Abnormal"

The trigger for the gold crash in March 2026 was the sudden escalation of the US-Iran conflict—the blockade of the Strait of Hormuz endangered about 20% of global oil supply, and Brent crude soared to $120 a barrel.

Under normal logic, high oil prices support gold prices via inflation expectations, and geopolitical tension should boost demand for safe-haven assets. But this time, the market interpreted the shock with a different "filter": The sudden rise in energy costs, if it forces the Federal Reserve to adopt more aggressive tightening, will directly break the previous global liquidity easing trend that underpinned gold’s rise. Cross-asset linkage strengthened sharply, and deleveraging swept indiscriminately across gold.

Investors, to meet liquidity needs and lower portfolio Value-at-Risk (VaR), exerted additional selling pressure on gold while reducing positions—explaining why, in times of geopolitical upheaval, safe-haven assets ironically become "victims."

Safe-Haven Attribute Fails Under Liquidity Black Hole: Gold Turns from Shelter to ATM

Gold’s safe-haven attribute is not constant. Its correlation with equities and bonds is markedly time-variant, with market liquidity stress as the core variable.

  • Normal liquidity conditions: Gold-equity correlation is near zero (about 0.1), gold provides independent diversification value.
  • Early stages of liquidity stress: Gold starts to show weak safe-haven properties.
  • Extreme liquidity stress (LSI Index hits extremes): The safe-haven logic fails entirely. Gold-equity correlation nearly zero (0.0066), gold no longer hedges, and institutions treat it as "high-liquidity cash asset," selling it first to cover equity margin shortfalls.

This mechanism has historical precedents. During the Lehman crisis in 2008 (VIX hit 80), gold suffered a sharp drop in October, gold-equity correlation briefly hit 0.6; in 2020, the pandemic triggered a triple drop in stocks, bonds, and gold; and in January 2026’s “Wash Trade,” similar features appeared.

March 2026 data fully confirms this:

  • US VIX index breached the panic line of 31;
  • CBOE gold volatility index (GVZ) soared above 45, near 2008 financial crisis levels;
  • Global gold ETFs saw a monthly outflow of $12 billion, setting a record and halving net inflows for the quarter to $12 billion;
  • Commodity Trading Advisors (CTAs) quickly closed positions after gold broke below 50/55-day moving averages on March 16, further amplifying the downward momentum.

When liquidity stress reaches extreme thresholds, gold’s “safe-haven asset” attribute temporarily yields to its “liquidity tool” attribute. Institutions’ indiscriminate selling to meet margin calls is the key to understanding this round of gold’s sharp fall.

Turkish Central Bank Sells Gold: Liquidity Emergency, Not Strategic Signal

In March, the Turkish Central Bank reduced its gold reserves for three consecutive weeks, totaling about 120 tons (100 tons official reserves, 20 tons commercial policy banks), sparking concern about whether central banks globally are making a strategic exit from gold.

However, this interpretation is fundamentally flawed. As of Q4 2025, Turkey's gold reserves accounted for 55% of total official reserves, far higher than China, India, Brazil, and most emerging markets (typically under 10%). For Turkey, gold is not a long-term strategic asset, but a liquidity management tool to deal with lira depreciation and high domestic inflation.

The scale of this reduction is comparable to Turkey’s operations to stabilize the exchange rate from March to May 2023, belonging to emergency management under extreme domestic macro constraints, and does not conflict with the global central bank strategic gold buying logic since 2022.

Another corroborating data point comes from the Federal Reserve. Since the outbreak of war with Iran on February 28, 2026, foreign central banks have sold $82 billion worth of US Treasuries held at the New York Fed, bringing custody holdings to their lowest since 2012. Five consecutive weeks of selling mark the most sustained official retreat from US government debt since the 2008 crisis.

This further indicates central bank operations are mainly driven by liquidity stress, not re-evaluation of gold's allocation value.

Resilience of Central Bank Gold Buying Unchanged: Global Order Reshuffling Provides Continuous Support

Despite sharp market turbulence in March, the long-term trend of global central bank gold buying remains unchanged. In 2025, global central banks’ net demand for gold reached 863 tons, marking the 16th consecutive year of net buying. In the first two months of 2026, central banks worldwide net purchased gold totaling 31 tons, with more economies joining in.

Detailed data show the upward trend is broad and diverse:

  • Polish Central Bank: Bought 20 tons in February (global leader), official reserves at 570 tons, 31% of FX reserves;
  • Uzbekistan Central Bank: Fifth consecutive month of net purchases (up 8 tons in February), gold is 88% of FX reserves;
  • Kazakhstan Central Bank: Bought 8 tons in February, reserves up to 348 tons (highest since January 2023);
  • Bank Negara Malaysia: First net gold purchase since 2018;
  • People’s Bank of China: Official gold reserves now at 2,308 tons, accounting for 10% of FX reserves;
  • African Central Banks: Uganda and Kenya central banks signal increased holdings, showing the trend of gold-based reserve diversification spreading to more economies.

The underlying logic behind this trend is clear and stable: Since 2022, more central banks are buying gold via non-LBMA channels and prefer to store gold domestically.

US Fiscal Fragility Closes Door on Aggressive Tightening; Petro-Dollar System Shakes

Another pillar of the gold bull market—Fed policy space being limited—has not only remained, but continues to strengthen.

On the fiscal front, US debt interest costs reached $970 billion in FY2025, exceeding defense spending for the first time. The “debt spiral” driven by high rates (high interest → more borrowing → higher interest) makes fiscal tolerance for substantial monetary tightening extremely low.

Mechanistically, nearly 80% of Middle East crude now goes to Asia, and the US is no longer the main oil buyer. The foundation of the “security for dollars” agreement is shaken, and the petro-dollar recycling mechanism faces structural collapse.

Fiscal fragility and petro-dollar loosening constitute structural constraints limiting the Fed’s tightening. The Fed today cannot compare with the Volcker era.

After Liquidity Clearing, Gold Returns to "Fundamental" Drivers

This round of liquidity shocks has not shaken gold’s fundamentals, but laid a foundation for more stable rises ahead.

In the short term, the key signal for gold will be whether tightening expectations correct. Once concerns over aggressive hikes ease, gold will gradually emerge from the liquidity shock shadow and re-price for inflation factors.

In the medium to long term, the three basic logics—global order restructuring, de-dollarization, and central bank strategic gold buying—all remain intact. The US-Iran conflict is both a product of ripping the old order and a catalyst for the new one, solidifying consensus on gold as a reserve asset. Against the backdrop of accelerating fragmentation in global payment systems and rising alternatives, gold's central price will continue to benefit from a long credit reconstruction as the monetary system shifts from a “dollar monolith” to “reserve diversification.”

Notably, after this forced clearing of liquidity overpricing, the subsequent gold rally may be more steady and solid, unlike the frenzy in 2025. For long-term allocators to gold, this provides a healthier investment environment.

Risk Disclosure and DisclaimerMarket is risky; invest cautiously. This article does not constitute personal investment advice and does not take into account individual users' special investment goals, financial circumstances, or needs. Users should consider whether opinions, views, or conclusions herein fit their specific situation. You invest at your own risk. ```