Gold plunges for a week! The "1983 great sell-off" reappears, Middle East "selling gold for financing"?

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Gold experienced its most severe weekly drop in 43 years this week, with echoes from history chilling the market.

This week, gold saw its largest weekly decline since March 1983, with spot gold prices falling for eight consecutive trading days, marking the longest losing streak since October 2023. Meanwhile, silver fell more than 15% this week, and both palladium and platinum declined as well.

The catalyst for this plunge was the escalating Middle East conflict driving up energy prices, which in turn suppressed rate cut expectations. Bets on a Fed rate hike rose to 50%, intensifying the wave of precious metal sell-offs.

What makes the market even more alert is that the current situation is highly similar to the historic crash in March 1983 triggered by large-scale gold selling by Middle Eastern oil producers—back then, OPEC members whose oil revenues plummeted were forced to sell their gold reserves for cash, and gold prices crashed by more than a hundred dollars within days.

Notably, historical data shows that this week's drop in gold is the most severe since the “selling gold to raise funds” storm 43 years ago.

Rate cut expectations shattered, gold's hedging logic fails

Since the US and Israel attacked Iran last month, gold has been falling for several weeks, a sharp contrast to its traditional role as a “safe haven asset.”

The reason is that war does not bring easing expectations, but inflationary pressure. The market's forecast for the Fed's policy path has fundamentally reversed.

Traders now bet the probability of a Fed rate hike before October has risen to 50%. High energy prices are fueling inflation expectations, and as a non-interest-bearing asset, gold is far less attractive in an environment of rising real interest rates.

Meanwhile, there are signs of tightening dollar liquidity in the current market. Cross-currency basis swaps started widening markedly this week, indicating some degree of dollar funding pressure.

This phenomenon may explain the deeper logic behind the sell-off in gold—when dollar liquidity tightens, gold is often one of the first assets investors cash in.

It is worth noting that the most dramatic metal market declines this week were concentrated during Asian and European trading hours, which aligns with the pattern that dollar shortages appear first in offshore markets.

Technical stop-loss triggers, self-reinforcing sell-off

Amidst continuous declines, gold's technical indicators have deteriorated significantly; the 14-day Relative Strength Index (RSI) has fallen below 30, entering an area seen by some traders as oversold.

StoneX Financial analyst Rhona O'Connell pointed out that this round of gold correction is the result of both profit-taking and liquidity clearing. She said that gold prices previously attracted a large number of buyers above $5200, making the market accumulate considerable vulnerability to pullbacks.

Once prices started to slip, a large number of investors' stop-loss orders were automatically triggered, forming a rapidly self-reinforcing spiral of selling. Technical signals such as moving averages further intensified the downward pressure.

Meanwhile, passive selling triggered by declines in the stock market has also affected gold.

O'Connell noted that forced liquidations related to equity assets may have dragged down gold prices, while the slowdown in central bank gold purchases and continued outflows from gold ETFs further dampened market sentiment. According to Bloomberg data, gold ETFs have seen net outflows for three weeks in a row, with holdings decreasing by more than 60 tons in three weeks.

The specter of the 1983 Middle East “selling gold to raise funds”

The current situation reminds market participants of the gold crash sparked by the oil crisis 43 years ago.

Historical records show that around February 21, 1983, British and Norwegian oil producers cut prices first, putting OPEC under pressure to follow suit, and the global oil market's oversupply intensified abruptly. With oil revenues slashed, Middle Eastern oil producers (mainly OPEC members) were forced to sell their gold reserves on a large scale to raise cash, triggering a gold price avalanche.

The New York Times' report at the time confirmed this judgment. According to The New York Times on March 1, 1983, traders explicitly stated that gold selling by Middle Eastern oil producers was the direct trigger for the gold price crash, and warned that if oil revenues dropped further, these Arab states might sell even more gold. At that time, gold prices plummeted by more than $105 within less than a week, with a single-day drop of $42.5—the largest in nearly three years.

According to The New York Times at the time, funds from the Middle East sell-off flowed immediately into Eurodollar and other short-term investment instruments, causing short-term rates to soften and warning the global gold market. As February 21 coincided with US Presidents' Day, the New York market was closed, and the shock became fully evident only the following week, then triggering chain forced liquidations, affecting copper, grains, soybeans, sugar, and other commodity markets.

ZeroHedge pointed out that the gold crash in 1983 marked the entry of the oil market into a bearish cycle that lasted for years—OPEC discipline declined, market share continually eroded, and oil prices remained under pressure throughout the 1980s.

Stagflation clouds loom—Can gold prices stabilize?

Despite the hit this week, gold has still risen about 4% so far this year. In late January, gold prices approached a historic high of nearly $5600 per ounce, then supported by investor enthusiasm, a surge in central bank gold buying, and market concerns about Trump interfering with Fed independence.

However, the current macro environment has deteriorated significantly. According to Bloomberg, Goldman Sachs economist Joseph Briggs expects rising energy prices to drag global GDP down by 0.3 percentage points over the next year and push overall inflation up by 0.5 to 0.6 percentage points. The risk of stagflation is rising, severely squeezing central banks’ policy room.

Goldman Sachs analyst Chris Hussey pointed out that the blockade of the Strait of Hormuz is now in its fourth week, and hopes for a quick resolution of the conflict are fading. If the conflict persists, the longer oil prices stay high, the harder it is for stock and bond markets to “look past short-term pain,” exposing the greater vulnerability of global assets.

For gold, real interest rate trends will be the key variable. If the conflict drags on and inflation expectations continue to climb, the Fed’s rate hike path will become clearer and gold’s pressure may continue; but if there are signs of easing geopolitical tensions, whether suppressed safe-haven demand can be released again remains the biggest suspense in the market.

Risk Warning and DisclaimerThe market has risks, investment needs caution. This article does not constitute personal investment advice and does not take into account the unique investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article suit their specific situation. Investments made based on this article are at your own risk. ```