Gold prices have fallen approximately 12% since the onset of the Middle East conflict, a move Standard Chartered attributes to short-term liquidity needs rather than a fundamental change in the metal's safe-haven status. The sharp decline has taken COMEX gold from record highs set in January to deeply oversold technical levels.
"The price action is more likely a 'fake-out' than a fundamental change in the long-term logic for holding gold," Suki Cooper, Global Head of Commodity Research at Standard Chartered, said in a Financial Times column. Cooper expects prices will resume their upward trend in the coming months to challenge historical highs.
The sell-off was rapid enough to flip technical indicators from one extreme to another. In January, spot gold's deviation above its 50-day moving average was the largest since 1999. Following the conflict, its deviation below the same average is the widest since 2013. This was largely driven by investors selling gold to meet margin calls in falling equity markets.
With gold's 200-day moving average holding as a key support line since October 2023, the bank believes the market has not yet priced in rising recession and stagflation risks. Historically, gold has gained an average of 15% during economic recessions.
Liquidity and Rate Fears Drive Selling
According to Cooper, the initial drop was a function of gold's utility as a source of liquidity during market turmoil. Historically, such pressure on gold lasts four to six weeks before investors rebuild their positions. The recent record highs in both gold prices and exchange-traded product (ETP) holdings made the metal a primary candidate for selling to raise cash.
Adding to the pressure, market expectations for US Federal Reserve interest rate cuts have cooled. Higher interest rates increase the opportunity cost of holding non-yielding bullion. ETPs saw their largest net redemptions in March since September 2022, though the pace of outflows has started to slow, suggesting crowded long positions may be cleared.
Structural Bull Case Unchanged
Despite the short-term headwinds, Standard Chartered argues the fundamental reasons for holding gold are still strong. The bank notes that current prices do not reflect the risk of a recession, where gold typically outperforms industrial commodities.
Furthermore, the market has not fully priced in stagflation risks. Even if the Middle East conflict were to end, elevated oil prices would likely persist, fueling inflation. Gold is a traditional hedge against sustained and unexpected inflation. Longer-term drivers, including high global debt levels, currency debasement concerns, and persistent geopolitical uncertainty, continue to provide a structural tailwind for the metal.
This article is for informational purposes only and does not constitute investment advice.
