Amid the Iran war shock, gold, the traditional safe-haven asset, is facing its most severe crisis of confidence in recent years. Having fallen more than a quarter from its January all-time high, the sharp decline in the gold price has forced the market to re-examine the asset's pricing logic—is this a deep dip within a long-term bull market, or the beginning of a bubble burst? Gold prices rebounded this week after former President Trump hinted that hostilities might end sooner than expected, briefly climbing back near the $4,500 level. However, analysts widely believe the market is far from calm. The trigger for this decline is clear. The selling pressure following the outbreak of the Iran war primarily stemmed from investors being forced to liquidate gold holdings to meet margin calls in equity and bond markets. Data firm Vanda estimates that global gold ETFs have seen cumulative outflows of approximately $10.8 billion since the war began. Simultaneously, the war has pushed inflation expectations higher and reduced expectations for interest rate cuts, increasing the relative attractiveness of bonds and further pressuring gold prices.

Western Securities believes that gold's current primary pricing reflects its reserve value, which is negatively correlated with US dollar credibility. The current rise in oil prices, with the scale of petrodollar trade stable but prices rising, is creating temporary headwinds for gold. However, the firm argues that if the US ultimately fails to gain control of the Strait of Hormuz, or if it opts for quantitative easing under liquidity pressure, both scenarios would lead to a widening of cracks in US dollar credibility, potentially driving gold to new record highs. The True Logic of the Selloff: Not a Failure of Gold, but a Liquidity Crunch This round of sharp gold decline saw a drop of up to 27% from the intraday high in January to the low of this week. The decline in the five trading days before Trump's post threatening to strike Iranian energy facilities was the worst such period since 2013. However, multiple analysts point out that the main driver of this decline is not a fundamental breakdown of gold's safe-haven logic, but rather a passive liquidity-driven selloff. StoneX analyst Rhona O'Connell stated that gold "almost inevitably falls" when stocks and bonds plunge sharply, because investors need to liquidate holdings to cover losses in other markets. She cautioned investors against "falling into the 'safe-haven asset' trap." According to Bloomberg, Jason Turner of German bank Berenberg noted that data from hedge funds and brokers shows financial institutions have been "liquidating profitable gold positions to meet margin calls in equity and bond markets." Charles Gave and Louis-Vincent Gave of Gavekal Research offered the simplest explanation for this selloff: gold was significantly overbought before the war erupted, and during market turmoil, overbought assets are the first to be sold—a pattern somewhat similar to gold's "sharp rise, sharp fall, then sharp rise again" trajectory during the 1970s oil crises. The Drift in Fundamental Correlations: The Puzzle of Gold Decoupling from Real Rates The confusion surrounding gold's pricing logic had been brewing even before the war started. From after the global financial crisis until early 2022, the gold price maintained a very stable inverse correlation with US real interest rates: rising real rates pressured gold, while falling real rates benefited it. However, research by Deutsche Bank's Tim Baker, reported by Bloomberg, shows this relationship has nearly disappeared since 2022. In its place, the gold price in recent years has begun moving in tandem with US nominal rates and emerging market stocks—the latter being typical risk assets, contrary to its "safe-haven" attributes. A Bloomberg opinion piece pointed out that gold's recent price curve bears a striking resemblance to the Nasdaq Composite Index just before the dot-com bubble burst in 1999-2000. Both peaked shortly after touching a major round-number threshold, and both experienced a rapid surge of approximately 80% in the months leading to the peak. Data from the World Gold Council in January showed record global gold ETF purchases that month, with particularly strong buying in Asian markets—echoing the retail investor frenzy seen before the Nasdaq bubble peak. John Reade also indicated that the increased dominance of speculative investors in the gold market since last year has significantly amplified price volatility. The Long-Term Logic Endures: Cracks in Dollar Credibility May Be Hard to Reverse Despite short-term pressure, strategists holding a bullish view believe gold's core pricing logic remains intact, and may even be strengthened by developments in the war. A report released today by Western Securities notes that US long-term real rates have remained high since October 2022, yet gold prices have continued to rise, suggesting the market is pricing gold's "reserve value" rather than its "trading value." The accelerated widening of cracks in US dollar credibility following the Russia-Ukraine conflict is driving central banks and sovereign wealth funds to diversify their reserve assets more quickly. The report argues that the oil price rebound triggered by the US-Iran conflict superficially repairs the petrodollar system's credibility, leading to a temporary strengthening of the US dollar and pressure on gold. This mechanism has caused gold to fall even more than risk assets like stocks, resulting in an "undeserved selloff." However, if Iran maintains long-term control of the Strait of Hormuz, the volume of oil trade settled in US dollars would face a substantive impact. At that point, dollar credibility would confront deeper erosion, and gold prices could return to an upward trajectory. Looking at historical precedent, from the collapse of the Bretton Woods system in the 1970s to the second oil crisis in 1980, gold saw a maximum increase of nearly 20 times over the decade. During the two oil crises in that period, gold prices rose by 79% and 291% respectively, both experiencing sharp interim corrections. The Fed Policy Variable: New Leadership as a Potential Catalyst Another key variable influencing gold's medium-term trajectory comes from the direction of Federal Reserve personnel and policy. The unresolved expectation that Trump will nominate Kevin Warsh as the next Fed Chair is itself adding uncertainty to gold prices. A Bloomberg opinion piece noted that new Fed Chairs typically face a market "stress test," needing to prove their resolve against inflation—meaning that even under continued White House pressure to cut rates, a new chair might push for tighter rate expectations, which would be negative for gold. However, analysts with a contrary logic believe that if a Warsh-led Fed is forced into quantitative easing under liquidity pressure, cracks in dollar credibility would widen faster, potentially providing a stronger upward driver for gold. Analysts at BMO stated this week that once market risk appetite recovers, gold has the potential to reclaim "most" of its "war losses." Ash from BullionVault, citing the 2008 financial crisis, pointed out that gold prices also fell during the "shaking out and panic stage" then, but subsequently proved to be "the perfect asset for the financial crisis." Is the Selloff Over? Volatility Likely Remains the Biggest Risk The current market consensus is that gold price volatility will remain elevated for the foreseeable future. Whether the selling wave has ended largely depends on whether overall market volatility can subside. Analysts at Gavekal explicitly stated that in the current crisis, gold has shown it is "not an 'anti-fragile' asset," introducing far greater volatility risk into portfolios than expected. They believe selling pressure will persist until "overall market volatility declines, and companies and countries shift back from 'just-in-case' inventory management to 'just-in-time' supply models." After Trump hinted on Monday that the war might conclude early, gold prices rebounded—while crude oil prices remained largely unchanged, gold quickly recovered its losses from Sunday night's session. This reaction clearly shows that gold investors are extremely eager for any signal that reduces geopolitical risk premium, and also indicates that bullish conviction has not completely collapsed. For investors looking to buy the "golden dip," the key question at this moment may not be whether gold's long-term logic holds, but when market volatility will truly exit its most dangerous phase.