Ignore the Turkish "gold selling" noise; liquidity disruptions are nearing an end, and gold's safe-haven appeal is about to return!

Middle East conflict continues to escalate and oil prices have stayed at elevated levels; meanwhile, gold has seen an abnormal, sharp drop in this round of geopolitical tensions. However, this anomaly is not a collapse of underlying fundamentals, but rather stems from a short-term liquidity disruption—and this disruption is now nearing its end.

In its latest monthly report, CICC Zheshang Securities pointed out that regardless of whether the geopolitical situation heats up or cools down, gold is expected to benefit. This “two-way benefit” logic gives it a rare value for allocation in today’s chaotic market environment.

Specifically, previously the market followed the trading logic of “oil prices rise → rate-cut expectations retrace,” but the report states that if oil prices remain high for more than a quarter, the demand-destruction effect will begin to show, and economic fundamentals will weaken significantly. In other words, the higher the oil price and the greater the recession risk, the more rate-cut expectations may actually warm up. With the current conflict already lasting a month, the turning point for the market to switch from “rate-hike trading” to “recession trading” may be right around the corner.

At the same time, the trend of global central banks increasing gold holdings has not changed. Turkey selling gold is just a case; because it is highly dependent on imported energy, has a high share of gold reserves, and has very few U.S. Treasuries, it is essentially forced financing for oil imports. Major European countries’ gold reserves have long been stable, and they also serve as an endorsement function for European credit, leaving little motivation to reduce holdings,

In addition, improvements in the positioning structure also provide conditions for gold to return to fundamental-based pricing. Currently, COMEX gold non-commercial net long positions and retail positions have both fallen significantly versus the earlier period; the liquidity-related disturbances that had suppressed gold are now nearing their end.

Why did gold “fail” during geopolitical conflicts? Liquidity is the real culprit

Historically, the loss of gold’s safe-haven attributes often occurs during liquidity crises, such as the 2008 financial crisis and March 2020. In this round of the Middle East conflict, the underlying logic for gold’s sharp drop in the early stage is the same, and it comes from liquidity disturbances on three levels:

First, a surge in oil prices reverses rate-cut expectations, tightening global liquidity overall. As oil prices rise rapidly, expectations for rate cuts over the course of the year quickly pull back; the market even began to anticipate rate hikes around March 20. This directly tightens the overall global liquidity environment and exerts downward pressure on gold.

Second, the scale of multi-asset strategies swells, and systematic deleveraging occurs under tail risk. In 2025, global assets generally rose strongly, driving the rapid development of multi-asset strategies (FOF). Data show that from January 2025 to March 2026, equity fund shares grew by 13.6%, while FOF fund shares grew as much as 111.2%. When tail risk arrives, multi-asset strategies systematically reduce positions, causing the abnormal phenomenon of different assets falling in sync.

Third, retail funds chase rallies and then sell, amplifying liquidity disruptions. Gold’s strong performance attracted a large influx of retail funds. During the pullback in March, they then flowed out sharply. Data show that both COMEX gold futures’ non-reporting date net long positions and SPDR Gold ETF holdings have fallen significantly; retail’s behavior of chasing gains and then selling further amplifies the liquidity-related disturbance to gold.

Turkey’s central bank selling gold is a one-off case; the global trend of central banks buying gold remains unchanged

Recently, Turkey’s central bank announced it would sell gold, triggering market concerns that central banks’ gold-buying logic has reversed. The report argues that this concern has been overinterpreted, and Turkey’s actions have highly specific background factors.

According to data cited by Reuters from Thursday, Turkey’s central bank gold reserves dropped by more than 118 tons over the past two weeks, worth nearly $20 billion. Of this, last week alone, reserves fell sharply by 69.1 tons to 702.5 tons. The volume of sell-offs over the week set the largest single-week decline record since at least 2013. Also, according to estimates by three banking industry professionals, in just the week of last Monday, about 26 tons of gold were sold directly, while about 42 tons were used through swap transactions; in the prior week, gold reserves decreased by 49.3 tons.

Turkey’s energy demand is highly dependent on imports, and rising oil prices force it to purchase more energy with dollars. At the same time, gold accounts for nearly half of Turkey’s official reserves, while the share of U.S. Treasuries is extremely small; it cannot obtain the dollars it needs by selling Treasuries, so it can only sell gold.

Other countries with higher shares of gold reserves and lower energy self-sufficiency are mainly concentrated in Europe. Germany’s gold makes up 82% of official reserve assets, France 80%, and Italy 79%. But European countries currently still have relatively ample energy reserves, and gold serves as a credit endorsement function for the euro.

Data show that the size of gold reserves in Germany, France, Italy, and others has remained nearly unchanged in recent years. In the absence of obvious liquidity pressure, the probability of European countries selling gold in the future is relatively low, and the long-term trend of central bank gold buying will not be reversed by Turkey’s one-off case.

Market trading paradigms may switch, and gold will enter a two-way benefit logic

The prior market trading paradigm was: rising oil prices equal rate-cut expectations retracing, meaning the market believes the Fed’s focus is on inflation. In March, the U.S. manufacturing PMI was 52.7, reaching a recent high. Under strong fundamentals, this trading logic has been relatively smooth.

However, if oil prices stay at high levels for more than a quarter, the demand-destruction effect may start to show, and economic fundamentals will weaken significantly. At that time, the higher oil prices are, the greater the recession risk, and rate-cut expectations for the Fed may actually heat up. Given that the conflict has already lasted a month—and market expectations often lead fundamentals—if oil prices continue to stay high, the inflection point for the market to switch from “rate-hike trading” to “recession trading” may be right around the corner.

This leads to gold’s “two-way benefit” logic:

• If the geopolitical situation further escalates: the market shifts to recession trading, rate-cut expectations strengthen, and gold benefits;

• If the geopolitical situation cools: oil prices fall, rate-cut expectations also turn stronger, and gold benefits as well.

In addition, after the declines in the earlier period, gold’s crowding-of-positions problem may have been released to a fairly sufficient extent. As of March 24, COMEX gold non-commercial net long positions (roughly representing institutions) are at the 25.3rd percentile since 2020, while non-reporting-date net long positions (roughly representing retail) are at the 79.9th percentile; both have fallen significantly versus the earlier period.

Improvements in the position structure mean that the liquidity-related disturbances that had suppressed gold are now nearing their end, and gold pricing is expected to gradually return to fundamental logic.

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