
An atypical response to geopolitical risk. Gold has not reacted to the US-Iran war as it typically would in other conflicts. The expectation was for increased hedging demand and more durable risk premiums for gold, but the opposite has unfolded; aside from a momentary spike in the immediate aftermath of the opening strikes, gold has been on a sharp downward trajectory. As at 24 Mar, gold is hovering just above the USD4,300/oz. mark, and is roughly flat on a YTD basis. So why has gold made such unprecedented moves (again) and defied its role as a traditional safe haven amid the chaos of war? The short answer is inflation; markets are pricing in the probability of a protracted conflict, higher-for-longer energy prices, and eventually higher inflation and rates. The immediate selling pressure that we are witnessing is also liquidity-related to some extent, where gold is being used as a funding source for margin calls as the war continues to drive a volatile risk-off market. In short, there are both technical as well as fundamental factors that are worth noting for this sell-off.

Correlations lining up suggest liquidity-driven selling. Several datapoints suggest the current sell-off is at least partially liquidity-driven. Firstly, gold is falling in tandem with other asset classes, including equities, bonds, and even cryptocurrencies. The sharp moves amid a broad risk-off market environment suggest gold is being used as a funding source to meet margin calls for other assets. We compared the correlation between gold and other major asset classes pre-war and post-war and found that gold became significantly more correlated with all other major asset classes, sans crude oil, in the latter period. This is a sign of liquidity-driven selling and is similar to what happened during the Covid-19 pandemic, when gold dropped c.12.5% despite massive uncertainty due to funding needs elsewhere.
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