Liquidity Crisis Behind Gold’s Plunge Echoes 2008, When a Rebound Followed!

As tensions in the Middle East intensify again and markets worry that the United States could launch another round of military strikes against Iran, gold, traditionally a safe-haven asset, has suffered a sharp sell-off, falling last Friday to its lowest level in more than a year. This contrasts with the traditional pattern of investors flocking to gold, US Treasuries and the dollar when regional conflicts escalate.

During US President Trump’s second term, the market’s approach to seeking safety is changing. The technology stock rally that drove US equities higher over the past four years, together with the recent sharp reversal in those stocks, is disrupting traditional flows into safe-haven assets.

Last Friday’s sharp stock market sell-off spilled over into precious metals through a liquidity-driven flight to safety. Investors urgently needed cash after suffering losses on their equity investments and sold gold to raise funds. When the stock market sell-off occurred, gold was already in a weak and vulnerable position, with prices hovering above a major support level established in July. Once that technical support broke, gold’s decline accelerated.

Meanwhile, performance across asset classes suggests that investors are already pricing in the risk of further deterioration in the Persian Gulf situation. Markets fear a major military escalation could occur as early as this week, destabilising the region. Trump’s recent remarks have heightened those concerns. His social media posts indicated that the relevant parties had already drawn up plans for large-scale strikes.

Despite escalating tensions in the Middle East and the elevated risk of renewed regional warfare, gold remains under pressure and has struggled to sustain any substantial rebound. Worsening regional conditions, alongside resilience in the US economy, could encourage the Federal Reserve to maintain high interest rates for longer and keep US Treasury yields elevated, preventing a sustained recovery in gold prices.

With technology companies’ earnings broadly meeting expectations and selling pressure in the artificial intelligence sector intensifying, market attention is shifting towards risks to economic growth. Gold could receive some support if the AI sector sell-off deepens, particularly if election results indicate voter opposition to data centre construction.

Market Analysis:

Despite near-term pressure, gold prices could rise over the longer term, particularly if the Federal Reserve shifts to interest rate cuts in 2027. The current simultaneous decline in gold and equities is reminiscent of the 2008 financial crisis. Gold bottomed in October that year before rising more than 250% over the following three years. The US government needs to continue expanding the money supply to finance its enormous debt. Over the long term, this would provide very strong support for gold.