Is gold being wrongly punished by liquidity shocks? Standard Chartered predicts: Gold prices will rebound and break records again

Source: Jin10 Data

Gold’s safe-haven status has once again been questioned. Since the outbreak of conflict in the Middle East, gold prices have plummeted sharply. This contradicts the traditional view that gold, as a safe-haven asset, provides stability (or appreciation) during market turbulence, increased uncertainty, or geopolitical tensions. However, Suki Cooper, Head of Global Commodities Research at Standard Chartered Bank, believes that even if gold’s role shifts in the short term, its safe-haven position remains solid, and she expects gold prices to challenge historical highs once again. Her views are as follows.

Gold can play both the leading role and a supporting role in the market, but this does not mean it has lost its traditional functions.

During crises, investors rotate between assets, and losses in the stock market can trigger additional margin calls. Gold is one of the few assets that can be liquidated at any time to provide liquidity without incurring significant losses.

Historically, such liquidity demands tend to suppress gold prices within 4 to 6 weeks after a crisis erupts; once liquidity pressures ease, investors will re-enter gold holdings. If the crisis persists, this process may take longer—for example, during the global financial crisis, it took more than four months for gold to recover its losses.

Although this time, the decline in gold prices far exceeds that during previous geopolitical conflicts (especially Middle Eastern wars), this divergence is not without reason.

In January, gold prices hit a record high, and exchange-traded products (ETPs) tracking gold also surged to new highs due to investor demand, making gold the primary target for selling. In January, the premium of spot gold relative to the 50-day moving average soared to its highest level since 1999. Now, the situation has reversed: spot gold has fallen below the 50-day moving average, with the deviation being the largest since 2013. Gold, which was in an overbought zone in January, has shifted into oversold territory after the conflict broke out.

So, what signals is the gold price trend sending? First, the market remains uncertain about the duration of the conflict, and liquidity demands persist. The spike in implied volatility of gold to levels seen during the pandemic is evidence of this.

Gold is also currently returning to a short-term trend dominated by U.S. interest rate expectations and policy responses surrounding the current crisis.

In the long term, if market expectations for rate hikes increase, the opportunity cost of holding gold rises (since gold does not generate dividends or interest), and gold prices tend to fall. This correlation was temporarily broken at the end of 2022 due to central bank gold purchases, but in recent weeks, as expectations for U.S. rate cuts this year have cooled, the relationship has reasserted itself.

Fund flows into ETPs and central bank gold purchases are two key indicators to watch. ETP investors focus more on real yield expectations rather than structural drivers. The net redemption of ETPs in March could set a record since September 2022, indicating that short-term funds are moving away from gold’s structural and safe-haven allocation logic. However, ETP selling has begun to slow, suggesting that the overheated positions from earlier may have been largely cleared.

On the central bank side, markets are paying attention to whether their accumulated gold reserves in recent years show signs of liquidation. Last year, central banks’ net gold purchases slowed from over 1,000 tons to 863 tons, but in dollar terms, they still hit a record high.

Meanwhile, the reasons supporting higher gold prices are also sufficient. Currently, gold prices do not incorporate recession risks. During recessions, gold typically gains an average of 15%, while industrial commodities tend to be dragged down by declining output.

Additionally, gold prices have not reflected stagflation concerns. Even if the conflict ends tomorrow, oil prices are likely to remain high for longer, exacerbating inflation worries. As a store of value, gold usually performs well in environments of rising inflation, especially when inflation exceeds expectations and persists.

Many structural drivers of gold remain solid, including concerns over high debt levels in the U.S. and globally, currency devaluation, tariffs and trade uncertainties, and geopolitical risks.

Gold is currently priced with multiple risks in mind, so its short-term trend is unlikely to be linear. Existing liquidity pressures may continue to suppress gold prices for a while. However, we still expect gold prices to rebound in the coming months. On the downside, the 200-day moving average has never been broken since October 2023, providing strong support. The overall direction of the gold market remains upward.