Persistent Middle East conflicts and elevated oil prices have led to an unusual significant decline in gold during this round of geopolitical tensions. However, this anomaly does not signal a breakdown in fundamental logic but stems from short-term liquidity disruptions, which are now approaching their conclusion.
In its latest monthly report, Zheshang Securities pointed out that gold stands to benefit regardless of whether geopolitical tensions escalate or de-escalate. This "two-way advantage" logic grants it rare allocation value in the current uncertain market environment.
Specifically, the market previously followed the trading logic of "rising oil prices → scaled-back rate cut expectations." However, the report notes that if oil prices remain high for more than a quarter, demand destruction effects will begin to emerge, significantly weakening the economic fundamentals. In other words, higher oil prices increase recession risks, which may in turn fuel expectations for interest rate cuts. With the current conflict lasting a month, the inflection point for a market shift from "hawkish trading" to "recession trading" may be imminent.
Simultaneously, the trend of global central banks increasing their gold reserves remains unchanged. Turkey's gold sales are an isolated case, driven by its high dependence on energy imports, a substantial proportion of gold reserves, and minimal holdings of U.S. Treasury bonds, making it a forced financing move for oil imports. Major European countries maintain long-term stability in their gold reserves, which also serve to back the credibility of the euro, providing little incentive for reduction.
Furthermore, improvements in holding structures create conditions for gold to return to fundamental pricing. Currently, both COMEX gold non-commercial net long positions and retail holdings have significantly decreased from previous levels, indicating that the capital-side pressures that previously suppressed gold are nearing an end.
Why did gold "fail" as a safe haven during geopolitical conflict? Liquidity is the real culprit.
Historically, the loss of gold's safe-haven attribute often occurs during liquidity crises, such as the 2008 financial crisis and March 2020. The initial sharp decline in gold during the current Middle East conflict follows the same underlying logic, stemming from liquidity disruptions on three levels:
First, surging oil prices reversed rate cut expectations, leading to a broad contraction in global liquidity. As oil prices rose rapidly, expectations for rate cuts within the year quickly receded, with the market even anticipating potential rate hikes around March 20, directly tightening global liquidity conditions and putting pressure on gold.
Second, the expansion of multi-asset strategies led to systematic position reductions under tail risks. The broad rally in global assets in 2025 fueled the rapid growth of multi-asset strategies (FOF). Data shows that from January 2025 to March 2026, equity fund shares grew by 13.6%, while FOF fund shares surged by 111.2%. When tail risks emerge, systematic reductions in multi-asset strategies cause the unusual phenomenon of synchronized declines across different assets.
Third, retail investors' trend-chasing behavior amplified capital-side disruptions. Gold's previous strong performance attracted substantial inflows from retail investors, which then saw significant outflows during the March pullback. Data indicates that both COMEX gold futures non-reportable net long positions and SPDR Gold ETF holdings declined sharply, with retail investors' buy-high-sell-low behavior further exacerbating gold's capital-side volatility.
The Turkish central bank's gold sales are an exception; the global trend of central bank gold buying remains intact.
Recent announcements of gold sales by the Turkish central bank raised concerns about a reversal in central bank gold purchasing logic. The report argues that these concerns are overinterpreted, as Turkey's actions are highly unique.
According to Reuters data from Thursday, the Turkish central bank's gold reserves plummeted by over 118 tonnes in the past two weeks, valued at nearly $20 billion. Last week alone, reserves fell by 69.1 tonnes to 702.5 tonnes, marking the largest weekly decline since at least 2013. Three banking sources estimated that approximately 26 tonnes of gold were directly sold last week, with another 42 tonnes utilized through swap transactions; the previous week saw a reduction of 49.3 tonnes.
Turkey's high dependence on energy imports means rising oil prices necessitate more U.S. dollars for energy purchases. Meanwhile, gold constitutes nearly half of Turkey's official reserves, with minimal holdings of U.S. Treasuries, leaving gold sales as the only viable option to acquire needed dollars.
Other countries with high gold reserve ratios and low energy self-sufficiency are primarily in Europe. Germany's gold accounts for 82% of its official reserve assets, France 80%, and Italy 79%. However, European countries currently maintain relatively ample energy reserves, and gold serves to underpin the credibility of the euro.
Data shows that the gold reserve levels of Germany, France, Italy, and others have remained nearly unchanged in recent years. In the absence of significant liquidity pressures, the likelihood of European countries selling gold is low, and the long-term trend of central bank gold accumulation will not reverse due to Turkey's isolated case.
Market trading paradigms may shift, ushering in gold's two-way advantage logic.
The previous market trading paradigm was: rising oil prices equate to scaled-back rate cut expectations, meaning the market viewed the Fed's focus as primarily on inflation. With the U.S. manufacturing PMI reaching 52.7 in March, a recent high, this trading logic held under strong fundamentals.
However, if oil prices remain elevated for more than a quarter, demand destruction effects may emerge, significantly weakening economic fundamentals. In that scenario, higher oil prices would increase recession risks, potentially strengthening expectations for Fed rate cuts. Given that the conflict has persisted for a month and market expectations often lead fundamentals, if oil prices continue to stay high, the inflection point for a market shift from "hawkish trading" to "recession trading" could be imminent.
This forms gold's "two-way advantage" logic:
If geopolitical tensions escalate further: the market shifts to recession trading, strengthening rate cut expectations, benefiting gold.
If geopolitical tensions de-escalate: oil prices fall, rate cut expectations also strengthen, similarly benefiting gold.
Additionally, after the earlier decline, gold's overcrowding issue may have been sufficiently alleviated. As of March 24, COMEX gold non-commercial net long positions (roughly representing institutions) are at the 25.3 percentile since 2020, and non-reportable net positions (roughly representing retail investors) are at the 79.9 percentile, both significantly lower than previous levels.
The improvement in holding structure suggests that the capital-side disruptions previously suppressing gold are nearing an end, allowing gold pricing to gradually return to fundamental logic.
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