Gold’s Liquidity-Driven Plunge Recalls 2008 and the Rebound That Followed

Gold fell last Friday to its lowest level in more than a year as a sharp sell-off hit the traditional safe-haven asset. The decline came amid a renewed intensification of Middle East tensions and market concerns over another possible round of US military strikes against Iran. Rather than following the familiar pattern of flows into gold, US Treasuries and the dollar when regional conflict escalates, investors have been selling gold.

Traditional safe-haven flows are being reshaped during US President Trump’s second term. Technology shares, which powered gains in US equities over the past four years, have recently reversed sharply, disrupting the way investors seek safety.

The search for safety became a scramble for liquidity during last Friday’s steep stock market decline, carrying the selling into precious metals. Losses on equity holdings left investors with an urgent need for cash, prompting them to sell gold to raise funds. Even before shares fell, gold was poorly placed to withstand further selling: prices were hovering above an important support level established in July. A break below that technical level then quickened the decline.

Moves across asset classes also suggest that the possibility of a worsening situation in the Persian Gulf is already reflected in market pricing. Investors fear that a major military escalation, potentially destabilising the region, could come as early as this week. Adding to those concerns were Trump’s recent remarks, with his social media posts indicating that plans for large-scale strikes had already been drawn up by the parties involved.

Mounting Middle East tensions and a greater risk of renewed regional warfare have not relieved the pressure on gold, which has failed to maintain a substantial rebound. If regional conditions deteriorate while the US economy remains resilient, the Federal Reserve could be encouraged to leave interest rates high for longer. US Treasury yields could consequently remain elevated, standing in the way of a sustained recovery in gold prices.

Risks to economic growth are drawing more market attention as selling pressure builds in the artificial intelligence sector and technology companies report earnings broadly in line with expectations. Further declines in the AI sector could offer gold some support, particularly if election results point to voter resistance to data centre construction.

Market Analysis: Gold Retains Scope for Longer-Term Gains

Near-term weakness does not rule out a longer-term increase in gold prices, particularly should the Federal Reserve move towards interest rate cuts in 2027. A parallel can be drawn between the present decline in both gold and equities and the 2008 financial crisis. After bottoming in October that year, gold rose more than 250% during the following three years. The need for the US government to finance its enormous debt requires continued expansion of the money supply, which would provide very strong support for gold over the longer term.