"Gold’s ‘golden pit’: After reclaiming the $4,500 mark, has the sell-off ended?"

Under the impact of the Iran war, gold, the traditional safe haven asset, is experiencing its most severe crisis of faith in recent years. After falling more than a quarter from its historical high in January, gold's dramatic plunge has prompted the market to reassess its pricing logic—is it merely a deep pit in a long bull run, or the start of a bubble burst?

Gold prices rebounded this week after Trump hinted the conflict might end early, briefly returning to the $4,500 mark. However, analysts generally believe the market is far from calm. The causes of this decline are clear:

The selling pressure following the outbreak of the Iran war mainly comes from investors being forced to cash in gold to respond to margin calls in the stock and bond markets. According to data provider Vanda, global gold ETFs have seen cumulative outflows of about $10.8 billion since the war began. Meanwhile, the war has boosted inflation expectations and lowered expectations for rate cuts, increasing the relative appeal of bonds and further suppressing gold prices.

Western Securities believes that gold's current pricing mainly reflects reserve value, which is negatively correlated with US dollar credit. Currently, rising oil prices and stable oil-dollar trade volume and prices have created temporary constraints for gold prices. However, they believe that if the US ultimately fails to seize control of the Strait of Hormuz, or chooses quantitative easing under liquidity pressure, both scenarios would widen cracks in dollar credit, giving gold the chance to reach new highs.

The Real Logic Behind Selling: Not Gold Failure, But a Liquidity Stampede

In this round, gold prices have dropped by as much as 27% from the intraday peak in January to this week's low. The five-day decline before Trump's post threatening to strike Iran's energy facilities marked the worst record since 2013.

Nonetheless, several analysts point out that the main driving force behind this downturn is not a fundamental subversion of gold's safe-haven logic, but a passive liquidity stampede.

StoneX analyst Rhona O'Connell said that gold "almost inevitably falls" when stocks and bonds are crashing, because investors need to liquidate positions to offset losses in other markets. She warned investors not to "fall into the trap of 'safe haven asset'."

According to Bloomberg, Jason Turner of Germany's Berenberg Bank said hedge fund and broker data show that financial institutions have been "liquidating profitable gold positions to meet margin calls in the stock and bond markets."

Charles Gave and Louis-Vincent Gave of Gavekal Research attribute this round of selling to the simplest explanation: gold was already heavily overbought before war broke out, and during market turmoil, overbought assets are among the first to suffer—a pattern similar to the rapid rise and fall gold experienced during the oil crises of the 1970s.

Fundamental Correlation Drift: The Decoupling of Gold and Real Interest Rates

The confusion in gold's pricing logic was already seeded before the outbreak of war.

From the global financial crisis up to early 2022, gold prices maintained a very stable negative correlation with US real interest rates: rising real rates pressured gold prices, falling real rates benefited gold. But according to Bloomberg, research from Tim Baker at Deutsche Bank shows that since 2022 this relationship has nearly disappeared.

Instead, in recent years gold prices have begun to move in tandem with US nominal interest rates and emerging market stocks—the latter are classic risk assets, directly contrary to gold's "safe haven" attributes.

A Bloomberg column pointed out that gold's recent price curve closely resembles the Nasdaq Composite Index's performance before the internet bubble burst in 1999-2000. Both peaked soon after hitting integer milestones, and both saw about 80% rapid gains in the months preceding their tops.

World Gold Council data from January shows that global gold ETF sales hit a record that month, with Asian markets especially active buyers—mirroring the retail investor stampede into Nasdaq before the bubble's peak. John Reade also stated that since last year, speculative investors have dominated the gold market, significantly increasing price volatility.

The Long-Term Logic Remains: Dollar Credit Cracks May Be Hard to Reverse

Despite short-term pressures, strategists with a bullish view believe gold's core pricing logic still holds, and is even being reinforced by the progress of the conflict.

Western Securities' report released today points out that since October 2022, US long-term real rates have remained high, yet gold prices continue to rise. This indicates the market is pricing gold's "reserve value" rather than its "transaction value." Following the Russia-Ukraine conflict, cracks in dollar credit have accelerated, driving central banks and sovereign funds to diversify reserve assets more rapidly.

The report believes that the US-Iran conflict’s resulting oil price rebound superficially restored the credit of the petrodollar system, causing the dollar to strengthen temporarily and gold to come under pressure. This mechanism resulted in gold's decline even exceeding that of stocks and other risk assets, a "mistaken kill."

However, if Iran maintains long-term control over the Strait of Hormuz, the scale of oil trade settled in dollars will be materially impacted. Dollar credit will then face deeper erosion, and gold prices could return to an upward trajectory.

Historically, from the collapse of the Bretton Woods system in the 1970s to the second oil crisis in 1980, gold surged nearly 20-fold over a decade, with price increases of 79% and 291% during the two oil crises, both experiencing sharp mid-cycle swings.

Federal Reserve Policy Variables: A New Chair Could Be a New Catalyst

Another key variable affecting gold's mid-term trend comes from changes in Federal Reserve personnel and policy direction.

The expectation that Trump will nominate Walsh as Fed chair remains unresolved, adding uncertainty to gold prices. A Bloomberg column notes that new Fed chairs typically face a market "stress test" and must demonstrate resolve against inflation—meaning that even if the White House continually pressures for rate cuts, they may push for more hawkish expectations, which is negative for gold.

However, analysts with the opposite logic argue that if a Walsh-led Fed is forced to opt for quantitative easing under liquidity pressure, cracks in dollar credit will accelerate, providing gold with stronger upward momentum.

BMO analysts said this week that once risk appetite returns, gold prices can recover "most" of their "war losses." BullionVault's Ash cited the 2008 financial crisis case, noting that gold also plunged during the "shock and panic stage," but subsequently proved to be the "perfect asset to combat the financial crisis."

Has the Selling Ended: Volatility May Yet Be the Greatest Risk

The current market consensus is that gold's price volatility will remain high for the foreseeable future, and whether the selling wave has ended depends largely on the overall market volatility cooling off.

Gavekal analysts emphasized that in the current crisis, gold is showing it is "not an 'antifragile' asset," bringing far more volatility risk to portfolios than expected. They believe the selling will continue until "overall market volatility decreases, and companies and nations return from an 'in case' inventory management model to a 'just-in-time' supply model."

After Trump hinted on Monday that the conflict might end early, gold prices immediately rebounded—oil prices barely moved, but gold quickly regained its Sunday overnight losses. This reaction clearly shows gold investors strongly desire any signal that reduces geopolitical risk premiums, and also that bullish faith is not yet fully shattered.

For investors looking for a "golden pit" entry point, the question now is perhaps not whether the long-term logic of gold holds, but when market volatility will truly exit the most dangerous stage.

Risk Warning and DisclaimerThe market has risks, and investment should be cautious. This article does not constitute personal investment advice and has not considered the unique investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions presented here are suitable for their specific circumstances. Investing based on this is at your own risk.