Huatai Securities: The long-term asset reallocation logic for gold remains solid; focus on recovery opportunities after recent gold price declines stabilize.

Huatai Securities’ research report states that the recent drop in gold prices is mainly driven by a liquidity squeeze; when facing risks, investors tend to hold cash, and assets such as gold are likely to be sold off. On the one hand, the intensification of geopolitical conflicts in the Middle East is putting Gulf countries under cash-flow pressure, and gold may face near-term pressure to “move from fictitious to real”; on the other hand, concerns about stagflation combined with weaker expectations for rate cuts are increasing volatility in risk assets, triggering a liquidity squeeze. In the current macro environment, a similar situation can be referenced in the 1973–1975 oil crisis. At that time, gold prices went through a pattern of two declines and two rallies; the liquidity squeeze formed by investors avoiding risk and by economic recession was the main cause of the gold price decline, while stagflation and ample liquidity catalyzed the two rounds of upward moves. We believe the logic for gold’s medium- to long-term asset reallocation remains solid; during risk events, it is crucial to grasp the timing of investing.

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Huatai | Non-ferrous Metals: Gold - Grasping the Investment Timing During Risk Events

Key viewpoints

We believe the recent drop in gold prices is mainly driven by a liquidity squeeze; when facing risks, investors tend to hold cash, and assets such as gold are likely to be sold off. On the one hand, the intensification of geopolitical conflicts in the Middle East is putting Gulf countries under cash-flow pressure, and gold may face near-term pressure to “move from fictitious to real”; on the other hand, concerns about stagflation combined with weaker expectations for rate cuts are increasing volatility in risk assets, triggering a liquidity squeeze. In the current macro environment, a similar situation can be referenced in the 1973–1975 oil crisis. At that time, gold prices went through a pattern of two declines and two rallies; the liquidity squeeze formed by investors avoiding risk and by economic recession was the main cause of the gold price decline; stagflation and ample liquidity then catalyzed the two rounds of rallies. We believe the logic for gold’s medium- to long-term asset reallocation remains solid; during risk events, it is crucial to grasp the timing of investing.

Lower risk appetite and liquidity squeeze lead to pressure on gold prices

The recent decline in gold prices may be sourced from a liquidity squeeze. Based on CFTC positioning data, net long positions held by asset management institutions have fallen markedly—from 134,000 lots as of January 13 to 91,000 lots as of March 24, down 32.0%, to the lowest level in the past year. This reflects that when facing risk events, institutions tend to realize profits from and liquidate highly liquid assets such as gold to ease potential liquidity pressure. By comparison, in early November 2022, asset management institutions also shifted from net long to net short in gold holdings due to the Russia-Ukraine conflict combined with Federal Reserve rate hikes. We believe that the liquidity squeeze temporarily detaches gold from its traditional inflation-hedging attributes, thereby putting pressure on gold prices. Looking ahead, current net long positions of asset management institutions have already declined significantly, and crowding in longs has been clearly reduced; marginal selling pressure may be nearing the end of its release phase.

Macro: In the short term, gold faces pressure to “move from fictitious to real”

According to Huatai Macroeconomic research “When Oil Turns into ‘Gold’” (26-03-22), against the backdrop of the Strait of Hormuz being nearly sealed off and global energy facing physical shortages, in the short term gold has become a “canary in the coal mine” for cash-flow pressure in Gulf countries and emerging markets. Under the shock of shortages of physical supplies, the market shows intense pressure to “move from fictitious to real.” Because previously global central banks and private-sector holdings were at historical highs (the share of gold in reserves rose from 12.8% in 2020 to 24.5% by the end of 2025), and the gold-to-oil ratio has reached a record extreme after the war, gold is not a “must-have” in the short term. For Gulf countries whose cash flows are physically blocked by conflicts, reducing holdings of high-floating-profit gold in exchange for necessities is a rational choice.

During the 1973–1974 oil crisis, gold went through two cycles of rise and fall

During the first phase of the 1973–1974 oil crisis, gold prices experienced four stages: decline, rise, another decline, and a final rebound—across the entire period, gold prices surged significantly. After the outbreak of the fourth Middle East war on October 6, 1973, gold prices initially rose; then market panic led to a liquidity squeeze and gold prices fell (from $98.5/oz to $90.0/oz, a decline of 8.63%, between 11.9 and 11.23 on the gold price). From December 1973 to March 1974, the price per barrel of crude oil rose from $4.1 to $13. As war-related disruptions paused, market panic emotions subsided, and the market gradually switched to using stagflation hedging for safety; gold prices rose 73.67% to a high of $175/oz. In the 1974 Q1–Q2 U.S. economic recession, from March to July the gold price fell again by 21.6% to $136.5/oz. As the Federal Reserve shifted toward rate cuts, gold prices rebounded again in 1974 H2, rising 29.9% to $185.8/oz.

Watch for opportunities to rebound after recent gold price weakness stabilizes

Although gold faces near-term pressure, we still like gold’s logic for medium- to long-term safe-haven demand. Near-term gold price performance will depend heavily on how long the Strait of Hormuz blockade lasts and on the progress of global liquidity repair. From a medium- to long-term perspective, de-dollarization and fiscal unsustainability will continue to support gold’s allocation value, and gold’s pricing logic will shift toward hedging credit risk and asset reallocation. Based on the gold average price of $4,562 per ounce calculated for March 20, the portion of globally investable gold is only 3.35%. If, by 2026–2028, the globally investable gold share exceeds the 2011 peak (3.6%), reaching 4.3%–4.8%, the gold price could rise to $5,400–6,800/oz. However, before the strait reopens and the petrodollar cycle resumes, investors still need to be alert to risks of a liquidity squeeze similar to the mid-1974 scenario.

Risk warning: International geopolitical situation, downstream demand falling short of expectations, and liquidity squeeze caused by institutional position reduction.

（Source: First Financial）