China Securities Co., Ltd. has released a research report stating that while gold, which was highly popular in 2025, has entered a "quiet" phase in 2026 due to U.S.-Iran tensions, its price remains resilient. However, compared to other assets such as equities, copper, and oil, gold has underperformed significantly. The impact of U.S.-Iran geopolitical maneuvering on gold prices stems from its influence on inflation expectations, leading to a retreat in liquidity-driven pricing, which was the primary driver of the surge in gold prices since September of last year. Once the excessive liquidity premium subsides, gold is expected to revert to its fundamental drivers: structural shifts in global order and de-dollarization fueling central bank purchases. If the Russia-Ukraine conflict exposed fractures in the old global order, the deepening of geopolitical competition continues to advance. Therefore, gold's fundamental narrative is far from over. Benefiting from this conflict washing out excessive liquidity pricing, future gold price increases may become more gradual.
1. Deconstructing the Liquidity Shock in the March Gold Market The sharp decline in gold prices in March 2026 was not an isolated event but rather a result of intensified cross-asset correlations triggered by volatility in the global liquidity pricing theme. The key external catalyst was the rapid escalation of U.S.-Iran tensions, particularly Iran's threat to close the Strait of Hormuz, which caused oil prices to spike. A sustained surge in energy costs, potentially forcing the Federal Reserve into more aggressive action, led to fluctuations in the prevailing global liquidity narrative, strengthening linkages across asset classes. Broad market deleveraging also affected gold, as investors reducing positions to meet liquidity needs or lower portfolio Value-at-Risk (VaR) may have created additional selling pressure on the metal. Analysis of data from 2000-2026 reveals a significant time-varying correlation between gold and equities/bonds, closely linked to the level of liquidity stress. As liquidity pressures intensify, traditional safe-haven or hedging logic can undergo dramatic shifts or even break down. Under extreme liquidity conditions (a low-probability event), asset defenses can fail, corresponding to the LSI index breaching extreme values; a liquidity black hole can trigger a broad-based asset collapse. Examining the micro-mechanisms, under extreme stress, gold's character can shift from a "safe-haven asset" to a "highly liquid asset for raising cash," often involving margin calls and cross-asset risk parity rebalancing. Generally, simple price declines do not fully involve margin pressure, but when equity market panic (VIX) and gold volatility erupt simultaneously, it suggests the market experienced a round of "indiscriminate selling" in March. The U.S. VIX index briefly breached the panic level of 31 in March, while the implied volatility of South Korea's KOSPI index saw exponential spikes during multiple trading halts in early March. The CBOE Gold Volatility Index (GVZ) also surged significantly in late March, exceeding 45 and reaching historically high percentiles (near levels seen during the 2008 crisis and other major upheavals). Synchronized with significant equity market volatility, March witnessed a classic "liquidity storm" in gold. Global gold ETFs experienced a record outflow of $12 billion in March, halving the first-quarter inflow to $12 billion. Concurrently, gold selling driven by Commodity Trading Advisors (CTAs) likely amplified the downward momentum. According to World Gold Council estimates, CTAs generally held elevated long positions prior to mid-March. Reportedly, when the gold price broke below its 50/55-day moving average on March 16 for the first time in seven months, CTAs rapidly unwound positions, leading to a significant drop in net length. Similar liquidity shocks for gold were observed in 2008, 2020, and during the "Wash Trade" earlier this year. Despite the sharp price volatility, the core logic underpinning the current gold bull market—strategic easing of the global liquidity environment and de-dollarization of sovereign credit assets—remains unchanged. In fact, deepening geopolitical fragmentation and competition may strengthen gold's role as the ultimate store of value over the medium to long term.
2. Stability of Gold's Core Logic: Resilience of Central Bank Purchases The trend since 2022 of increased central bank gold buying via non-LBMA channels and more "gold repatriation" indicates that these purchases reflect a global shift from a U.S.-dominated unipolar world towards a more multipolar international system with greater Chinese participation. This logic aligns with the ongoing restructuring of the global order. The current U.S.-Iran conflict is both a consequence and a component of this restructuring and may act as a catalyst for shaping a new future order, potentially further solidifying consensus on gold's reserve asset status. The recent gold reserve reduction by Turkey's central bank, which drew market attention, was essentially liquidity contingency management under extreme domestic macroeconomic constraints, not a strategic reduction from a sovereign asset allocation perspective. Turkey's peculiarity lies in the significantly higher proportion of gold in its official reserves compared to other emerging markets, with gold serving as a primary tool to counter currency instability. To address exchange rate pressures stemming from energy shocks, weekly data from the Turkish central bank showed consecutive gold reserve reductions over three weeks starting the week of March 7, totaling approximately 120 tonnes. A further breakdown shows a 100-tonne reduction in official reserves and a 20-tonne reduction related to commercial policy banks. The scale is comparable to Turkey's operations in March-May 2023 aimed at stabilizing its currency. Central banks utilize tools like gold leasing and swaps to enhance reserve returns and manage liquidity. Such operations, involving temporary gold reductions similar to foreign exchange position management, do not conflict with the underlying logic of strategic gold accumulation by central banks post-2022. Furthermore, Federal Reserve data indicates that central banks also increased direct sales of U.S. Treasuries to hedge against rising energy price risks, supporting the view that the recent volatility was driven more by liquidity factors than a change in gold allocation strategy. It is reported that since the outbreak of the Iran war on February 28, 2026, foreign central banks have sold $82 billion worth of U.S. Treasuries held at the New York Fed, pushing their custodial holdings to the lowest level since 2012. Five consecutive weeks of selling mark the most sustained "retreat" by global official holders from U.S. government debt since the 2008 financial crisis.
3. Stability of Gold's Core Logic: A Delayed, Not Derailed, Rate Cut Cycle Given genuine concerns over fiscal pressure, the U.S. federal government's fiscal trajectory has entered an unprecedented fragile stage. The fiscal situation inherently limits the room for monetary policy to maintain substantially tight conditions. In fiscal year 2025, the interest cost on U.S. national debt reached $970 billion, surpassing defense spending ($893 billion) and Medicaid ($668.8 billion) for the first time, ranking only behind Social Security and Medicare. The surge in interest costs creates a dangerous feedback loop: to service the high interest, the government must borrow more, and new debt accrues even higher interest burdens in the current high-rate environment. This "debt spiral" has drastically reduced fiscal tolerance for restrictive monetary policy. Moreover, the "absolute anchoring" of oil to the U.S. dollar is loosening, meaning the Fed's current policy space is not comparable to the 1980s. When the primary buyers of oil are no longer the U.S., the economic logic underpinning the decades-old "security for dollar pricing" arrangement weakens. This creates favorable conditions for major importers like China to promote settlement in non-dollar currencies such as the renminbi, posing a fundamental challenge to the existing system.
4. Gold Outlook Post-Liquidity Squeeze: Returning to Core Fundamentals In the short term, following the liquidity squeeze, markets will enter a repricing phase. A clear bullish signal for gold will depend on a correction in tightening expectations. The Q1 2026 gold liquidity shock was essentially a stress test for the global macro system under the extreme conditions of "high inflation, high leverage, high conflict." The temporary vulnerability of safe-haven assets in the face of liquidity drought does not signify a breakdown in gold's core logic. If an uncontrolled Middle East scenario is no longer the base case, even with a systemically higher oil price floor, once tightening expectations are corrected, gold will gradually transition to pricing inflation. From a medium- to long-term perspective, global geopolitical competition is no longer an occasional "black swan" but a structural footnote in the shift of global supply chains and monetary systems from "efficiency-first" to "security-first." Gold will continue to offer a premium independent of U.S. Treasury real yields. The profound impact of the U.S.-Iran situation lies not in short-term oil price volatility but in the regionalization and defensive redundancy of global supply chains. In this environment, alongside the parallel fragmentation of the global financial settlement system (e.g., the rise of alternative payment systems), the gold price floor will continue to benefit from the credit contraction cycle as the monetary system transitions from a "unipolar dollar" to "multipolar reserves."
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