Liquidity Shock Pressures International Gold Prices, Year-to-Date Gains Wiped Out

Amid ongoing geopolitical conflicts in the Middle East, international gold prices have repeatedly fallen below key levels.

As of 6:00 PM on March 23, London spot gold temporarily fell below the $4,200 per ounce level during trading, dropping over 8% intraday, erasing all gains for the year. It then rebounded somewhat supported by buying interest; meanwhile, Shanghai gold opened sharply below 1,000 yuan per gram.

London Spot Gold Price Chart

Since the outbreak of Middle East conflicts, international oil prices have surged, triggering inflation expectations and significantly weakening the Fed and other major central banks’ short-term rate cut expectations, leading to a global asset revaluation. Wang Yanqing, Chief Analyst of Precious Metals at CITIC Construction Investment Futures, told Shanghai Securities News that the escalation of Middle East tensions has prompted markets to anticipate a global recession, causing a concentrated sell-off across various assets and a liquidity shortage that has heavily suppressed gold and silver prices.

Liquidity Shock Causes Gold “Out of Control”

Although geopolitical tensions usually boost safe-haven demand, this time, the Middle East conflict has transmitted through energy prices into inflation expectations, shifting market focus.

“Currently, the Middle East situation is developing into a long-term trend. If shipping through the Strait of Hormuz remains disrupted, oil supply tensions will be hard to alleviate, and oil prices will continue to rise,” Wang Yanqing said. Major global central banks are constrained by concerns over “oil-inflation,” leading to a significant cooling of rate cut expectations this year, which continues to pressure precious metal prices.

This pressure is also reflected in the opportunity cost of holding gold. Liang Zhonghua, Chief Macro Analyst at Guotai Haitong Securities, stated that real interest rates are rising sharply under market expectations of monetary tightening, and as gold is a non-yielding asset, it is also suppressed by the increase in real interest rates.

Furthermore, markets are worried that shortages will gradually spread from the energy sector to other areas, potentially leading to a global economic slowdown. Wang Yanqing noted that fears of recession have tightened liquidity in various asset markets, intensifying selling pressure on gold, stocks, and other assets.

Safe-Haven Trigger Conditions Still Needed

The sharp decline in gold prices has broken the traditional logic of “buying gold in turbulent times.” Investors are questioning: where is the safe-haven property?

Experts interviewed believe that, fundamentally, gold’s safe-haven function has not failed but has not yet entered the conditions for full activation.

According to Wang Yanqing, gold as a safe-haven asset essentially hedges against the weakening of the monetary credit system, not all types of risks. The reason why the current Middle East conflict has not fully triggered gold’s safe-haven role is mainly because it has not shaken the credibility of the US dollar.

Tan Yiming, Chief Fixed Income Analyst at Tianfeng Securities, believes that after this conflict erupted, safe-haven funds seem to prefer holding US dollars rather than gold. “First, gold is eroded by high interest rates, while holding dollars benefits from high yields; second, as a net oil exporter, the US may profit from the energy crisis; third, even if a small probability scenario of Fed rate hikes occurs, liquidity tightening would boost the dollar’s value,” Tan said.

So, who is selling gold? Liang Zhonghua explained that the current gold correction is mainly driven by continued outflows from the Americas. Investment enthusiasm for gold in the Americas is highly correlated with rate cut expectations. Against the backdrop of shifting monetary policy expectations and rising concerns about rate hikes, gold faced more downward pressure during the American trading session. Data from the World Gold Council shows that since March, gold ETF outflows have persisted in the Americas, while gold prices during Asian trading hours remain relatively resilient, with net inflows into Asian gold ETFs.

Gold May Remain Temporarily Under Pressure

In fact, market trading themes are not static.

“Initially, during the outbreak of risk events, gold prices were pressured due to liquidity shortages,” Wang Yanqing said. “If the Fed later implements quantitative easing or large-scale liquidity injections, gold prices could rebound sharply.” This indicates that gold’s safe-haven function is phased and conditional; initial liquidity shocks followed by monetary easing often lead to a pattern of falling then rising gold prices.

UBS Wealth Management’s CIO Office also believes that the recent pause in gold price gains aligns with previous early-stage geopolitical crises. “Investors usually first focus on liquidity and hedging tools, then return to gold markets as their expectations change.”

Liang Zhonghua said that in the short term, escalation of Middle East tensions could still push oil prices higher or amplify concerns about inflation and tightening monetary policies by major central banks, keeping gold under temporary pressure. From a medium- to long-term perspective, China Merchants Bank’s Capital Operations Center believes that if oil prices stay high and transmit to the real economy, it could exacerbate stagflation or even trigger recession expectations, leading to a decline in real interest rates and increased safe-haven demand, supporting gold’s upward movement.

UBS predicts that with ongoing geopolitical risks and declining US real interest rates lowering the opportunity cost of holding zero-yield assets, gold prices could reach new highs again this year.