2008 Revisited: Gold’s Plunge Mirrors a Liquidity Crisis That Preceded a Rebound!

Last Friday marked gold’s lowest price in more than a year. A sharp sell-off in the traditional safe-haven asset coincided with renewed tensions in the Middle East and fears of another round of United States military strikes against Iran. Escalating regional conflicts would normally draw investors towards gold, US Treasuries and the dollar. This time, gold’s performance has run against that pattern.

Technology stocks are altering traditional safe-haven flows during US President Trump’s second term. Their rally drove US equities higher over the past four years, but a recent sharp reversal in those shares is now helping reshape how the market seeks safety.

Cash needs transmitted last Friday’s sharp equity sell-off to precious metals as investors sought safety through liquidity. With losses on their equity investments creating an urgent need for funds, investors sold gold to raise cash. Gold had little protection against that selling pressure. When shares sold off, the metal was already vulnerable, trading just above a major support level established in July. Breaking that technical support made the decline faster.

The risk of further deterioration in the Persian Gulf appears already to be entering market pricing, judging by performance across asset classes. A major military escalation could destabilise the region, and markets fear it may arrive as early as this week. Recent remarks by Trump have intensified that anxiety: his social media posts indicated that the relevant parties had already prepared plans for large-scale strikes.

For gold, rising Middle East tensions and the increased risk of renewed regional warfare have not translated into a substantial, sustained rebound. Prices remain under pressure. Should regional conditions worsen while the US economy stays resilient, the Federal Reserve could be encouraged to retain high interest rates for longer. US Treasury yields could also stay elevated, blocking a sustained recovery in gold prices.

Economic growth risks are becoming a greater focus for markets as technology earnings largely meet expectations and selling intensifies in the artificial intelligence sector. A further deterioration in the AI sell-off could provide some support for gold. That support could be particularly relevant if election results show voters opposing data centre construction.

Gold Market Analysis:

A shift to interest rate cuts by the Federal Reserve in 2027 could be particularly supportive of longer-term gains in gold, even with prices under pressure in the near term. Today’s concurrent losses in gold and equities echo the 2008 financial crisis. From its October low that year, gold advanced more than 250% over the following three years. Continued expansion of the money supply is needed for the US government to finance its enormous debt. For gold, this would represent very strong support over the long term.