Gold is experiencing its most severe sell-off since 1983. As the traditional safe haven becomes a source of liquidity and interest rate hike expectations completely overshadow risk aversion, the question arises: where is the bottom for gold?

Driven by escalating inflation fears from the Middle East conflict and increasing global expectations for interest rate hikes, gold prices fell sharply by 8% at one point during Monday's session. This decline erased all gains for the year and marked the ninth consecutive day of losses. Last week, gold recorded its largest weekly drop since 1983.

During European trading hours on Monday, spot gold breached the $4,100 level, while spot silver fell more than 10%. Both metals had recovered somewhat from their intraday lows by the time of reporting.

Tim Waterer, Chief Market Analyst at KCM Trade, commented, "As the conflict with Iran enters its fourth week and oil prices hover around $100, market expectations have shifted from potential rate cuts to potential hikes. From a yield perspective, this significantly diminishes gold's appeal."

Over the weekend, the U.S. President issued an ultimatum to Iran, demanding it reopen the Strait of Hormuz within two days or face airstrikes on its power plants.

Iran responded by stating that if its power facilities were attacked, it would "completely" shut down the strategic waterway and strike energy, IT, and desalination infrastructure. The ultimatum was delivered at 7:44 PM ET last Saturday.

Waterer added, "During this period of high risk aversion, gold's high liquidity has ironically become its 'Achilles' heel.' The persistent decline in equity markets has forced investors to liquidate gold positions to cover margin calls for other assets."

Wayne Gordon, an Investment Advisor at UBS Group's wealth management unit, said, "The scale of the gold sell-off is not unprecedented, but the speed of the sell-off is much faster than in many historical periods."

Stock markets in Asia fell sharply on Monday as investors weighed the mutual threats between the U.S. and Iran targeting energy infrastructure. South Korea's KOSPI index plunged 6.49%, while Japan's Nikkei 225 index dropped 3.48%.

The potential closure of the Strait of Hormuz is keeping crude oil prices elevated, which in turn increases transportation and manufacturing costs, thereby fueling inflation concerns. While rising inflation typically enhances gold's appeal as a hedge, higher interest rates dampen demand for this non-yielding asset.

Market expectations for a Federal Reserve rate hike this year have surged dramatically, with the probability of a hike now far exceeding that of a cut. According to the CME FedWatch Tool, interest rate futures indicate a roughly 32% chance of a rate hike by December this year.

David Wilson, Head of Commodities Strategy at BNP Paribas, noted that gold's reaction to the "current macroeconomic shock" has clear historical precedents. He stated, "If you look at the previous three economic shock cycles—2008, 2020, and 2022—gold initially fell as the market reacted to the news, with investors typically selling assets to hold U.S. dollars." He added that all three cycles were followed by sustained rallies.

From a technical perspective, the 14-day Relative Strength Index (RSI) for gold continued its decline, falling below 30—a level some traders consider indicative of an oversold condition. Meanwhile, weekly data from the CFTC released last Friday showed that hedge funds and other large speculators had increased their net long positions in gold to a seven-week high as of March 17.