The gold market, after experiencing its steepest decline in years, has seen bargain hunters step in, temporarily preserving the dignity of the three-year bull run. This month, gold prices have fallen by a cumulative 15%, with the drop from the January closing peak nearing 19% at one point, approaching the 20% threshold that typically signals the start of a bear market. However, a turnaround emerged on Friday as investors re-entered the market, driving a roughly 3% rebound in gold prices and helping to repair market sentiment.
Several market participants maintain that the underlying structural logic supporting gold remains intact. George Efstathopoulos, a portfolio manager at Fidelity International, described the recent pullback as a "buying opportunity," stating that "inflation risks, fiscal pressures, and questions about bond credibility are still long-term structural tailwinds for gold." Max Layton, Global Head of Commodities Research at Citigroup, expressed a similar view in a Bloomberg Television interview, indicating that once speculative positions are cleared out, the bank would be "aggressively bullish on gold" and is "confident" that prices will be higher one year from now.
The sell-off has roots in a confluence of multiple pressures. The Iran conflict triggered a broad sell-off across stock, bond, and currency markets, forcing investors to liquidate gold holdings to cover losses in other assets. Concurrently, the conflict drove oil prices higher, which pushed up bond yields, diminishing the appeal of the non-yielding asset. A significant strengthening of the US dollar also put pressure on investors using other currencies to buy gold.
Signs of softening emerged at the central bank level as well. In the two weeks following the outbreak of the Iran conflict, Turkey sold and swapped over $80 billion worth of gold to protect the lira's exchange rate. This move also dampened market sentiment, as central banks have been core buyers of gold throughout the bull market cycle. Daniel Ghali, a commodity strategist at TD Securities, believes that, for now, the broader trend is more likely a gradual slowdown in the pace of central bank gold accumulation rather than a full shift to net selling.
Gold ETFs have borne the brunt of the selling pressure during this downturn. Popular with both retail and institutional investors, gold ETFs had seen net inflows in all but one of the past 14 months, according to Bloomberg calculations, with this sustained demand providing crucial support for a 70% price increase over the same period. This month, however, ETF flows have reversed sharply and are on track for the largest monthly net outflow since 2022, erasing all inflows recorded so far this year. ETF investors are particularly sensitive to interest rate changes, and the current high-rate environment is a key factor suppressing demand. Hedge funds also joined the selling side last week, cutting their net-long positions in gold to the lowest level since last October.
Robert Minter, Director of ETF Investment Strategy at Aberdeen Investments, noted that stock market declines typically only cause minor, initial pullbacks in gold prices.
The bull market, which began in early 2023, has seen gold rise nearly 150% cumulatively. It was initially fueled by central banks accelerating gold purchases after Russia's foreign reserves were frozen, followed by hedge funds and eventually a wave of retail investors. The core narrative supporting gold's rise into 2025 was the so-called "currency debasement trade" – the idea that high-debt countries like Japan, France, and the US, lacking the will for post-pandemic fiscal consolidation, would find currency depreciation and inflation to be the only way out, with precious metals being the most direct beneficiaries. Robin Brooks, a former FX strategist at Brevan Howard and Goldman Sachs, now a senior fellow at the Brookings Institution, admitted he has become a "believer" in this logic, citing historical correlations between gold and safe-haven currencies like the Swiss franc as evidence.
However, the outbreak of the Iran conflict has temporarily shifted market attention away from debt and fiscal deficit concerns. John Reade, Chief Strategist at the World Gold Council, stated, "People are taking profits because the 2025 narrative for gold has been temporarily put on the back burner. But that doesn't mean those long-term themes have disappeared; they're just not the most pressing issues right now."
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