Why Does the Liquidity Crisis Behind Gold’s Plunge Echo 2008, When Gold Subsequently Rebounded?

Gold’s sharp sell-off took prices last Friday to their lowest level in more than a year, even as renewed tensions in the Middle East fuelled concerns that the United States could carry out another round of military strikes against Iran. The decline in the traditional safe-haven asset runs counter to the usual response to escalating regional conflict, when investors seek shelter in gold, US Treasuries and the dollar.

The way markets seek safety is evolving during US President Trump’s second term. Traditional flows towards safe-haven assets are being disrupted by technology stocks, whose rally propelled US equities higher over the past four years before their recent sharp reversal.

An urgent need for liquidity carried last Friday’s steep equity sell-off into precious metals, as investors seeking safety sold gold to raise cash after losses on their stock investments. Gold was already vulnerable when equities tumbled, with prices sitting just above a key support level formed in July. The subsequent breach of that technical support accelerated the fall in gold prices.

Pricing across asset classes, meanwhile, indicates that investors are already factoring in the risk of a further worsening of the situation in the Persian Gulf. A major military escalation that could destabilise the region is feared as early as this week. Recent comments from Trump have added to market unease, with his social media posts suggesting that the parties concerned had already prepared plans for large-scale strikes.

Gold has been unable to sustain a meaningful rebound and continues to face pressure, notwithstanding mounting Middle East tensions and the heightened risk of renewed warfare in the region. A deterioration in regional conditions, combined with a resilient US economy, could prompt the Federal Reserve to keep interest rates high for longer. That could also hold US Treasury yields at elevated levels, preventing a lasting recovery in gold prices.

Risks to economic growth are moving into focus as technology companies’ earnings largely match expectations and selling in the artificial intelligence sector gathers pace. A deeper AI sector sell-off could lend gold some support, especially if election results signal that voters oppose data centre construction.

Market Analysis: Can Gold Recover Over the Longer Term?

A longer-term rise in gold prices remains possible despite immediate pressure, especially if the Federal Reserve turns to interest rate cuts in 2027. Gold and equities falling together today recalls the pattern seen during the 2008 financial crisis: after reaching a bottom in October that year, gold gained more than 250% over the next three years. Financing its enormous debt requires the US government to keep expanding the money supply, which would offer very strong support for gold over the long term.