Many people are flummoxed by gold’s deep correction over the last two weeks. Given there’s a war on, shouldn’t gold be catching a strong safe-haven bid?
In fact, the pattern playing out in the gold market isn't out of character. We saw similar dynamics in the early days of the 2008 financial crisis and the pandemic.
As I’ve already reported, the historical pattern since the 1980s suggests that, beyond an initial safe-haven bump, a war alone doesn’t seem to significantly impact the trajectory of gold prices. As wars drag on, other factors tend to drive the market – particularly monetary policy.
This has proved true so far in the Iran conflict. After initially surging to $5,400 an ounce at the onset of hostilities, gold quickly corrected as worries about inflation and higher interest rates drove the price down.
World Gold Council analysts say there are several dynamics weighing on gold, led by inflation concerns.
“Sharply higher real yields and expectations that policy rates will now rise in 2026, alongside de‑leveraging and profit‑taking, have all weighed on sentiment.”
Many people believe the Fed will be forced to hold rates higher for longer to deal with an oil price shock and inflation surge. The World Gold Council noted that “The oil market disruption and the Fed’s hawkish stance further cooled investors’ hopes on future cuts, pushing up yields and leading to accelerating global gold ETF outflows, mainly from U.S. funds.”
I agree that interest rate worries will likely create continued headwinds for gold. However, the markets seem to be ignoring the giant Debt Black Hole and the shaky nature of the economy. An oil shock would not only cause prices to rise more generally, but it could also be the pin that pricks the debt-riddled bubble economy. In that situation, the Fed would almost certainly pivot to looser monetary policy – not tighter.
The World Gold Council also acknowledged that political and economic realities may tie the central banker’s hands.
“Any signs of the Strait of Hormuz reopening – alleviating energy disruptions - could rebuild investor confidence. On the flip side, prolonged disruptions could lead to intensifying expectations of rate hikes – though political constraints and the mounting debt burden in the U.S. may limit the Fed’s room to raise.”
Does History Repeat?
More broadly speaking, despite its safe-haven nature, it’s not unusual to see gold fall in the early days of a crisis. As the World Gold Council pointed out, gold plunged in the early days of the 2008 financial crisis and the pandemic.
“The speed and breadth of market moves echo risk-off episodes seen in 2008 and 2020, when liquidity dynamics temporarily dominated fundamentals.”
Many people forget that gold was in a bull market in early 2008 but suffered a significant selloff at the onset of the financial crisis when the yellow metal fell 32 percent, giving up about 40 percent of its previous bull market gain. Gold then took off and soared by over 153 percent over the next few years.
Over the last several weeks, we've seen everything from equities to bonds to commodities selling off. It appears many investors are moving to cash to wait out the uncertainty of the war. When everything sells, this often triggers margin calls, forcing investors to liquidate assets to raise cash. Given gold's liquidity, it is often the first victim in a "sell-everything" environment.
Worries about higher interest rates are also intensifying concerns about overall liquidity, and there are signs of stress in the private credit market.
The private credit market refers to non-bank lenders, such as private equity firms, asset managers, and other specialty funds. These institutions lend money directly to companies, providing alternative funding options for companies and individuals.
When an economy becomes overleveraged, there is generally some spark that triggers a meltdown. In the late 1990s, it was the dot-com bubble. In 2008, it was the real estate bubble. I recently wrote about concerns that the AI bubble could cause a credit market meltdown. A prolonged war may speed up that process.
In a recent interview, Verified Investing market strategist Gareth Soloway said there are already “severe cracks” in the private credit market. He noted that several big private income funds (funds that invest in private debt) have started “gating” investors. In effect, they are placing limits on withdrawal requests. For instance, Morgan Stanley’s North Haven Private Income Fund is strictly enforcing a 5 percent quarterly cap. As a result, the fund only met 45.8 percent of redemption requests. The fund reportedly made the move when withdrawal requests spiked to nearly 11 percent.
On Tuesday morning (March 24), Bloomberg reported that Ares Management has also limited withdrawals from its $10.7 billion credit fund.
Soloway said this stress is being reflected in the gold market as investors use the yellow metal’s liquidity to cover their liabilities.
“All of a sudden, they're down 20-plus percent on their positions, and that can create margin calls.”
Soloway said those players have to be wiped out before gold resumes “its north trajectory.”
This is exactly what happened in both 2008 and 2020.
Rising Treasury yields also reflect stress in the credit markets as demand for U.S. debt remains tepid. Soloway called the spiking 10-year Treasury rate a “yield shock” equivalent to a 50-basis point Fed rate hike.
“I think the bond market is in play here and actually dictating policy,” Soloway said, speculating that rising yields may have motivated President Trump to walk back strike threats.
How this plays out will depend on how long the war continues. The longer the conflict goes on, the more likely bubbles will begin to pop.
Looking Ahead
In the meantime, expect significant volatility in the gold market with more downside risk.
World Gold Council analysts said they are in a “wait-and-see mode.”
“The prospect of a prolonged Middle East conflict is concerning, as it raises humanitarian and geopolitical risks alongside the threat of economic stagnation and higher industrial input prices.”
However, long-term, they remain bullish on gold.
“Although short-term shocks may affect gold’s near-term trajectory, the broader forces of multi-polarization, rising geopolitical fragmentation, and persistent sovereign debt concerns should continue to support gold’s strategic role.”
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