‘Gold doesn’t always perform in crises’: Sell-off shows liquidity trumps safe-haven appeal

[SINGAPORE] In the traditional investment playbook, gold is the asset of choice when uncertainty peaks.

But with the deepening of the Iran war, the yellow metal has come under pressure, prompting investors to sell it to raise cash.

Between the Feb 28 outbreak of the war and 6 pm on Thursday (Mar 26), gold shed 14.6 per cent. The metal has, however, steadied after a nine-day losing streak, when investors were weighing incongruent statements from the United States and Iran on talks to end the war.

Market watchers told The Business Times that bullion’s retreat amid the war in the Middle East is actually consistent with historical patterns: Gold has tended to falter once uncertainty tips into a full-blown crisis.

Steve Land, portfolio manager at Franklin Equity, said of the “big difference” between a period of uncertainty and actual crisis: “Gold historically does not perform well in periods of crisis.”

He noted that the yellow metal was also “sold off heavily, along with everything else”, during the 2008 global financial crisis and the 2020 Covid-19 pandemic as investors scrambled for liquidity. “When an actual crisis hits, it tends to be just another thing that people can use to get liquidity,” he added. 

Capital reallocation into energy

Meanwhile, oil and gas prices have surged amid infrastructure damage and supply-chain disruptions in the Middle East, triggering a shift in capital towards energy markets.

Robin Tsui, Asia-Pacific gold strategist at State Street Investment Management, said that gold’s pre-conflict rally left it “vulnerable to profit-taking and technical selling”, even as some investors sold it to raise liquidity amid broader market volatility.

The shift in the risk landscape has also triggered a tactical rotation among institutional investors seeking to capitalise on the volatility in energy markets.

Land of Franklin Equity confirmed the “strong swing” in allocations among generalist funds toward energy producers. 

“We have also taken similar steps within our natural resources fund as well. We sold some mining names and bought some names at the beginning of the crisis, so we understand the rationale behind the trade,” he said. 

Hurdles for a non-yielding asset

Meanwhile, gold is also facing macro headwinds, as energy-driven inflation amid the Iran conflict has clouded investor expectations of near-term rate cuts by the US Federal Reserve.

Fan Shaokai, head of Asia-Pacific (excluding China) and global head of central banks at the World Gold Council, said that interest rate expectations are showing “greater influence over gold prices than anticipated”. Higher inflation risks further support real yields, which are a “key headwind” for a non-yielding asset like gold. He explained: “In the current environment, ongoing geopolitical stress combined with rising energy prices tends to channel capital into dollar-denominated assets, which partly dilutes gold’s traditional safe-haven role.”

Alexandra Symeonidi, senior corporate credit and sustainability analyst on William Blair’s emerging markets debt team, pointed out that while heightened geopolitical risk and tensions usually bode well for gold, “this time around is different”, as gold’s negative correlation with the US dollar has strengthened in recent years.

Central banks have led gold buying over the past four years, and Symeonidi noted that although the metal’s current price is more conducive for central bank purchases, these banks might prioritise defending their currency, fiscal concerns and balance-of-payments concerns, particularly in oil-importing economies.

Tsui also does not expect a sharp acceleration in Asian central-bank gold buying purely because of the price dip. But he added: “The recent pullback is unlikely to slow ongoing accumulation, as central banks typically purchase gold strategically over time.”

Tsui said that the key drivers for Asia’s central-bank buying include reserve diversification and comparatively lower gold allocations relative to foreign exchange reserves than Western central banks. 

‘Healthy deleveraging’ 

Gold’s recent softening amid the Middle East escalation of tension reveals a phase of forced liquidations among investors.

Fan of the World Gold Council said: “While gold has historically demonstrated resilience and tends to be among the first few asset classes to recover following periods of market stress, it is not entirely immune to short-term volatility.” 

Franklin Equity’s Land remarked that amid the crisis, the initial speculative fervour of gold has given way to a “healthy deleveraging” of the industry, particularly among hedge funds that entered the natural resource and mining equity sectors in the last year.

“This amount of volatility just sort of blows up a lot of those strategies,” he said, and added that capital is being pulled to cover losses elsewhere.

Though that is “painful”, Land expressed hope that it could lead to more fundamentally-driven money returning to the industry.

Looking ahead, Fan said: “If constraints around oil supplies persist and lead to inflationary pressures, this could result in downward pressure on gold prices.”

However, further geopolitical escalations could drive safe-haven demand in support of gold.

Beyond the immediate conflict, the trajectory of US interest rates, dollar strength and central bank buying activity will remain key drivers of gold in the near to medium term, noted Fan.