Iran war shocks gold market, central bank "permanent buyer" myth begins to waver!

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A core support of the gold market is starting to shake.

Since March, the Turkish central bank has sold and swapped about 60 tons of gold, an amount larger than the outflow from gold ETFs during the same period. The selling pressure from ETFs has already been significantly amplified by "cash is king" sentiment triggered by financial market turmoil, rising bond yields, and a stronger dollar.

Gold prices have retreated about 18% from the peak of $5,000 per ounce breached earlier this year. As the Middle East war continues to escalate and energy costs surge, more energy importing countries are being forced to use their gold reserves in exchange for dollars. The market consensus that central banks are the "one-way buyers" of gold is facing unprecedented challenges.

Turkey breaks the "central banks don't sell gold" tradition

The sheer scale of Turkey's gold sale has drawn the market's attention. Within two weeks in March, the country's central bank sold and swapped about 60 tons of gold, equivalent to over $8 billion, aimed at countering the surge in energy costs and mounting currency pressures brought by increased demand for dollars.

This scale surpasses the net outflow from gold ETFs during the same period—whose selling has already been under scrutiny due to overall financial market volatility, rising bond yields, and a rebounding dollar.

Nicky Shiels, head of metals strategy at MKS PAMP SA, said: "The narrative of central banks as permanent one-way buyers is being challenged."

Central bank gold buying spree: the cornerstone of the post-2022 gold bull market

Since the global financial crisis, central banks around the world have overall been net buyers of gold. In late 2022, the Russian forex reserve freeze highlighted the need to diversify away from dollar assets, spurring central banks to accelerate their buying. Sovereign buyers’ annual gold purchases have amounted to roughly a quarter of the world’s annual mined supply.

Driven by this, gold prices have more than doubled since 2022, breaking above $5,000 per ounce earlier this year.

However, the geo-economic shocks triggered by the Iran war are eroding this support. If more central banks follow Turkey’s example, overall gold buying will notably slow, and the long-held assumption that central banks are "reluctant sellers" of gold will face fundamental doubts.

Energy importing and Gulf countries: reserve dilemma under dual pressure

The transmission path of this risk is clearly visible. Some countries that have long accumulated gold reserves are energy importers themselves. A steep rise in oil and gas bills means fewer dollars are left to supplement precious metal reserves, thus reducing their gold-buying capacity.

Meanwhile, Gulf countries are also facing pressure. The blockade of the Strait of Hormuz for most energy exports has severely compressed the oil-dollar inflows these countries rely on to maintain their finances. Despite holding sizable diversified assets, the depletion of oil dollars still poses constraints on their reserve management.

Gold market lacks a "last buyer" mechanism, downside spiral risks rising

Unlike the US Treasury market, the gold market does not have a unified regulatory institution above all parties. This means countries’ gold assets are not threatened by being frozen, but it also means no institution like the Federal Reserve exists to act as a "last buyer" to prop up prices during crises.

Gold bulls now hope that China’s central bank can fill the demand gap. However, according to Bloomberg analysis, if emerging market economies collectively rush to the market to sell gold for dollars during a crisis, the self-reinforcing downward spiral of prices will be even harder to restrain.

Gold prices have already sharply corrected from the peak, and the trajectory of the war and uncertainty in the energy markets make it difficult to judge when this pressure will bottom out.

Risk Disclosure and DisclaimerThe market is risky and investment should be approached cautiously. This article does not constitute personal investment advice and does not take into account individual users’ specific investment objectives, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions in this article are suited to their particular situation. Invest accordingly, at your own risk. ```