As gold approaches a bear market, the bottom-fishing army is here!

The gold market, after experiencing its largest decline in years, has seen buyers enter the fray at lower prices, temporarily saving face for this three-year bull market.

This month, the cumulative decline in gold prices reached 15%, with a peak drop from January’s closing highs touching 19%, nearing the 20% warning line that typically marks the onset of a bear market. However, a turnaround occurred on Friday—investors re-entered the market, and gold prices rebounded by about 3%, restoring some market sentiment.

Several market participants insist that the structural logic supporting gold has not changed. Fidelity International fund manager George Efstathopoulos stated that this pullback is a “buying opportunity,” as “inflation risks, fiscal pressures, and bonds’ credibility issues continue to be long-term structural tailwinds for gold.”

Max Layton, global head of commodities research at Citigroup, also mentioned on Bloomberg TV that once speculative positions are cleared, the bank will “actively bullish on gold,” expressing “confidence” that gold prices will be higher than current levels in a year.

Causes of Sell-off: From Stock-Bond Linkage to Central Bank Reductions

The current decline in gold prices stems from multiple pressures.

The Iran war has triggered a widespread sell-off in stocks, bonds, and currencies, forcing investors to liquidate gold to cover losses in other assets.

At the same time, the conflict has driven up oil prices, increasing bond yields, which has diminished the appeal of this non-yielding asset; the dollar’s significant strength has also pressured investors using non-dollar currencies to buy gold.

There are also signs of loosening at the central bank level. Within two weeks of the outbreak of the Iran war, Turkey sold and swapped over $8 billion worth of gold to protect the lira’s exchange rate. This move has also harmed market sentiment, as central banks have been core buyers of gold throughout the bull market cycle.

Daniel Ghali, a commodity strategist at TD Securities, believes that currently, the trend is more likely to be a gradual slowdown in central bank gold accumulation rather than a complete shift to net selling.

ETFs Suffer Major Losses: This Month’s Outflow May Be the Largest Since 2022

In this round of declines, gold ETFs have become a concentrated outlet for selling pressure.

Gold ETFs are favored by both retail and institutional investors. According to Bloomberg data, there was only one month of net outflow in gold ETFs in the past 14 months, and the ongoing inflows of the metal provided crucial support for the 70% increase in gold during the same period.

However, this month, ETF fund flows have taken a sharp downturn, likely recording the largest single-month net outflow since 2022, wiping out all inflows for the year. ETF investors are particularly sensitive to interest rate changes, and the current high-rate environment is one of the main suppressing factors.

Hedge funds also joined the sell-side last week, reducing net long positions in gold to the lowest level since October last year. However, Robert Minter, ETF investment strategy director at Aberdeen Investments, pointed out that stock market declines typically only trigger slight gold price pullbacks in the early stages.

Is the Bull Market Logic Still There? The Narrative Is Temporarily “Set Aside”

This bull market began in early 2023, with gold rising nearly 150% to date. Initially, it was accelerated purchases of gold by central banks following the freezing of Russian foreign exchange reserves, followed by hedge funds stepping in, ultimately leading to a wave of retail participation.

The core narrative supporting gold’s rise in 2025 is the so-called “currency devaluation trade”—that is, high-debt countries like Japan, France, and the United States lack the willingness for fiscal consolidation post-pandemic, and currency devaluation and inflation will be the only way out, with precious metals being the most direct beneficiaries.

Robin Brooks, a former forex strategist at Brevan Howard and Goldman Sachs and now a senior fellow at the Brookings Institution, admitted he has become a “believer” in this logic, citing the historical correlation between gold and safe-haven currencies like the Swiss franc.

However, the outbreak of the Iran war has temporarily shifted market attention away from debt and fiscal deficit issues. John Reade, chief strategist at the World Gold Council, stated:

"People are taking profits because the 2025 gold narrative has temporarily been set aside. But that doesn’t mean those long-term themes have disappeared; they just aren’t the most pressing issues at the moment."

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