Dip-buyers arrive to pull gold back from brink of a bear market
(Bloomberg) — Opportunistic buyers are starting to emerge in the gold market after the biggest selloff in years, helping to keep bullion’s record-breaking three-year bull run intact.
Gold prices have fallen by 15% this month, creating a test of faith for gold bulls. That’s left some questioning the precious metal’s safe-haven credentials as the Iran war threatens to upend the global economy.
The meltdown has come as a broader selloff across stocks, bonds and currencies prompted investors to sell bullion to cover losses elsewhere. Turkey has also been offloading its holdings to support its currency and, while its sales weren’t the only drag on prices, there are worries that as the war intensifies a broader cohort of central banks could start selling.
The price of bullion slumped 19% from its January closing peak to the end of trading Thursday — nearing the 20% threshold that conventionally marks the start of a bear market. But by Friday investors stepped back in, driving prices about 3% higher as some money managers and banks insist that the underlying drivers of swollen government debts and a fractured geopolitical landscape are still in place.
The correction is a “buying opportunity” once tensions in the Middle East subside, said Fidelity International money manager George Efstathopoulos. “Inflation risks, fiscal pressures, and bond credibility are all still structural tailwinds for gold.”
Gold’s nearly 150% rally since the beginning of 2023 was kicked off by central banks, who started buying more after the freezing of Russia’s foreign exchange reserves highlighted the danger of having all their assets in the dollar basket. Hedge funds soon piled in, followed by a wave of retail buyers.
“There’s been basically half a year of really crazy buzz and that has to have sucked in a lot of people,” said Robin Brooks, a former FX strategist with Brevan Howard and Goldman Sachs Group Inc. who is now a senior fellow at the Brookings Institution. That set the scene for the selloff the market is experiencing now, he said.
Adding to the headwinds for gold, analysts have also pointed to the likelihood of the Iran war triggering central bank gold sales, or at least slowing purchases. Some states that have been accumulating bullion are energy importers, so a steeper oil and gas bill means fewer dollars retained to be recycled into gold.
One of those was Turkey, which sold and swapped more than $8 billion worth of gold in two weeks after the start of the Iran war, in a bid to protect the lira. Banks often swap gold for currencies while simultaneously agreeing to buy it back later, and that accounted for most of the activity.
Gold swaps should have little to no effect on prices, said Robert Gottlieb, a market commentator and former precious metals trader at JPMorgan Chase & Co. That’s because the commercial bank that strikes the deal with the monetary institution is unlikely to sell the metal it is effectively taking on as collateral, he said.
But Turkey also sold some gold outright in a move that — at scale — would have a much more direct impact on prices, and a more damaging influence on sentiment, given that central banks have been the cornerstone buyers throughout the bull market.
For the time being, the broader trend is likely be a step-change lower in pace of accumulation by central banks, rather than a full pivot to sales, according to Daniel Ghali, commodities strategist at TD Securities.
The energy price shock that emerged from the conflict has also driven up bond yields which leave gold looking less appealing as an asset that bears no interest. A surge in the dollar is also a headwind for investors paying for bullion in other currencies.
Much of the selling has taken place via gold-backed exchange-traded funds. Popular with both retail and institutional investors, metal has flowed into the ETFs for all but one of the last 14 months, turbo-charging bullion’s 70% rally over the same period. This month, they’re on track for the biggest outflow since 2022 and have erased all of this year’s inflows, according to Bloomberg calculations. ETF buyers tend to be particularly sensitive to interest-rate changes.
Last week hedge funds joined in the selling, reducing their exposure to gold to the lowest since October according to the most recent positioning data. The extent of the washout has encouraged some investors that most of gold’s losses are behind it.
“Equity market selloffs always bring a minor gold price pullback initially,” said Robert Minter, director of ETF investment strategy at Aberdeen Investments. “Gold acts as collateral to meet margin calls, but it usually is a minor pullback: selling stops and stabilizes the price before moving higher.”
Once speculative investors have been flushed out of their positions, “we would be really, aggressively, bullish on gold,” Max Layton, global head of commodities research for Citigroup Inc. said on Bloomberg TV. The bank is “confident” that the metal will be higher in a year’s time than they are today, he said.
Chief among the narratives that supported gold’s rise through 2025 was the so-called “debasement trade”. According to the thesis, heavily indebted countries like Japan, France and the US emerged from the pandemic with little apparent appetite for fiscal discipline. The only path to solvency then, is inflation and a weakening currency — a trend that precious metals should profit from.
“I am a reluctant convert to the debasement trade,” Brooks said, pointing to the past correlation between bullion and safe-haven currencies like the Swiss franc as evidence of its validity.
Still, with US President Donald Trump threatening Iran with intensified military action and Tehran stalling its response to proposed peace talks, war in the Middle East has decisively shifted investor focus from debt and deficits, for now. And the dollar has emerged from the conflict as the ultimate safe haven, rising against a basket of other currencies as the conflict escalated.
“People are taking some money off the table because the 2025 narrative for gold has moved onto the back burner for the time being,” said John Reade, chief strategist for the World Gold Council, an industry body. “It doesn’t mean any of those long-term themes have gone away. It’s just that they’re not the most important thing in your inbox at the moment.”
—With assistance from Galit Altstein.
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