Original title: (Gold Plummets in a Week! '1983 Mass Sell-off' Reappears, Middle East 'Sells Gold to Raise Funds'?)
Original author: Dong Jing, Wall Street Journal
Gold faced the most severe weekly drop in 43 years this week, and the echoes of history send chills through the market.
This week, gold fell by the largest weekly drop since March 1983, with spot gold prices declining for eight consecutive trading days, marking the longest losing streak since October 2023. Meanwhile, silver dropped more than 15% this week, with palladium and platinum also falling in tandem.
The trigger for this round of plummet is the ongoing escalation of the Middle East conflict, pushing up energy prices and thereby suppressing interest rate cut expectations. Market bets on the Federal Reserve raising interest rates have risen to 50%, intensifying this wave of precious metal sell-offs.
What alerts the market even more is that the current situation is highly similar to the historic crash caused by Middle Eastern oil-producing countries' massive gold sales in March 1983—at that time, OPEC members, faced with a sharp decline in oil revenues, were forced to sell gold reserves for cash, causing gold prices to plummet by more than $100 within a few days.
It is noteworthy that historical data shows this week's drop in gold is the most severe since the 'selling gold to raise funds' storm 43 years ago.
Interest rate cut expectations collapse, gold's safe-haven logic fails
Since the U.S. and Israel attacked Iran last month, gold has fallen for several consecutive weeks, which sharply contrasts with the traditional role of a 'safe-haven asset.'
The reason lies in the fact that the war does not bring easing expectations, but rather inflationary pressures. Currently, the market's expectations for the Fed's policy path have fundamentally reversed.
Traders currently bet that the probability of the Fed raising interest rates before October has risen to 50%. High energy prices are pushing up inflation expectations, while gold, as a non-yielding asset, has significantly decreased in attractiveness in an environment of rising real interest rates.
Meanwhile, there are signs of tightening dollar liquidity in the current market. Cross-currency basis swaps have widened significantly this week, indicating a certain degree of dollar financing pressure.
This phenomenon may explain the deeper logic behind the gold sell-off—when dollar liquidity tightens, gold is often one of the first assets investors liquidate.
It is noteworthy that this week, the most severe declines in the metal market were concentrated in the Asian and European trading sessions, which aligns with the pattern of dollar shortage pressure first emerging in the offshore market.
Technical stop-loss triggered, self-reinforcing sell-off
As prices continue to fall, many investors' stop-loss orders are automatically triggered, rapidly forming a self-reinforcing spiral of selling. Technical signals such as moving averages further exacerbate downward pressure.
StoneX Financial analyst Rhona O'Connell points out that this round of gold pullback is the result of both profit-taking and liquidity clearing. She stated that gold prices previously attracted a lot of buying above $5200, leading to considerable downside vulnerability in the market.
Once prices begin to slide, a large number of investors' stop-loss orders are automatically triggered, rapidly forming a self-reinforcing spiral of selling. Technical signals such as moving averages further exacerbate downward pressure.
Meanwhile, passive selling triggered by the stock market decline has also affected gold.
O'Connell points out that forced liquidations related to equity assets may have weighed on gold prices, while the central bank's slowing pace of gold purchases and continued outflows from gold ETFs further suppressed market sentiment. According to Bloomberg data, gold ETFs have recorded net outflows for three consecutive weeks, with total holdings decreasing by more than 60 tons over the three weeks.
The ghost of the 1983 Middle East 'selling gold to raise funds'
The current situation reminds market participants of the gold crash triggered by the oil crisis 43 years ago.
Historical data shows that around February 21, 1983, British and Norwegian oil producers were the first to cut prices, putting OPEC under pressure to follow suit, leading to a sudden increase in global oil market oversupply. Faced with a significant drop in oil revenues, Middle Eastern oil-producing countries (mainly OPEC members) were forced to sell gold reserves on a large scale to raise cash, triggering a gold price avalanche.
(New York Times) Reports at the time corroborated this judgment. According to a report from March 1, 1983 (New York Times), traders clearly stated that the sale of gold by Middle Eastern oil-producing countries was the direct trigger for the plunge in gold prices, warning that if oil revenues continued to decline, these Arab countries might sell more gold. At that time, gold prices fell by more than $105 from their highs in less than a week, with a maximum single-day drop of $42.5, the largest in nearly three years.
According to reports at the time (New York Times), the funds obtained from the Middle Eastern sales immediately flowed into eurodollars and other short-term investment instruments, causing short-term interest rates to soften and sending warning signals to the global gold market. Since February 21 coincided with the U.S. Presidents' Day holiday, the New York market was closed, and the shock did not fully manifest until the following week, triggering a chain reaction of forced liquidations that also impacted commodity markets such as copper, grains, soybeans, and sugar.
ZeroHedge notes that the gold crash of 1983 marked the beginning of a multi-year bear market cycle in the oil market—OPEC discipline weakened, market share continued to erode, and oil prices remained under pressure throughout the 1980s.
Stagflation clouds loom, can gold prices stabilize?
Despite being hit hard this week, gold has still accumulated a rise of about 4% this year. In late January this year, gold prices reached nearly $5600 per ounce, supported by investor enthusiasm, the central bank's gold buying spree, and concerns about Trump's intervention in the independence of the Fed.
However, the current macro environment has significantly worsened. According to Bloomberg, Goldman Sachs economist Joseph Briggs expects that rising energy prices will drag down global GDP by 0.3 percentage points over the next year and push overall inflation up by 0.5 to 0.6 percentage points. The risk of stagflation is rising, severely compressing the policy space for central banks.
Goldman Sachs analyst Chris Hussey points out that the blockade of the Strait of Hormuz has entered its fourth week, and hopes for a quick resolution to the conflict are fading. If the war continues, the longer high oil prices last, the harder it will be to sustain the narrative that stocks and bonds can 'see through short-term pain', further exposing the fragility of global assets.
For gold, the trend of real interest rates will be a key variable. If the war drags on and inflation expectations continue to rise, the Fed's path of rate hikes will become clearer, and pressure on gold may persist; however, once signs of easing in the geopolitical situation emerge, whether the suppressed safe-haven demand can be released again remains the biggest suspense in the market.
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