Author: Deep Tide TechFlow

On March 23, spot gold fell to $4,100, wiping out the annual gain.

Thinking back to 57 days ago, gold was still standing at the historic peak of $5,600; since the highest point, it has dropped more than 27%, marking the most severe decline since 1983.

Remember January 29th, when countless analysts around the world were shouting "Gold will break $6,000"? Instead, what came was a massacre.

Gold bulls, there were no survivors.

Those who once flaunted gold bars and showcased their achievements on platforms like Xiaohongshu now have posts that are filled with "wails everywhere."

All the tremors originated in the Middle East; the attack by the US on Iran has entered its 24th day, the Strait of Hormuz is closed, oil prices have surpassed $100, and the flames of war are burning hotter.

War should drive up gold prices; this is common knowledge that has been accumulated over thousands of years. But this time, common sense has failed.

Many people attribute the cause to interest rates, the dollar, stop-loss orders... none of these are wrong, but the real issue may be: When panic strikes in a crisis, institutions are not seeking value preservation, but liquidity.

The gold you bought is no longer the gold you thought it was.

Is gold not a "safe-haven asset"?

In the past three years, gold rose from below $2,000 to a historical peak, with a cumulative increase of over 150%.

During this rise, the market always had a ready explanation: safe-haven in turbulent times, collapse of the dollar's credibility, increasing reserves by central banks in emerging countries, de-dollarization... each point makes sense when taken alone and sounds quite compelling.

However, this explanation does not withstand data verification.

In the most severe inflation period from 2021 to 2022 in the US, gold fell for two consecutive years. After 2023, inflation began to cool down, and gold started to soar. There is a strong negative correlation between the two. In other words, the higher the inflation, the lower the gold; the lower the inflation, the higher the gold. The phrase "buy gold to hedge against inflation" has been a contrarian indicator over the past three years.

The actual interest rates from the Federal Reserve have remained high throughout these three years, and the textbook rule that "high rates suppress gold prices" has quietly failed as well.

Even more intriguing is the relationship between US stocks and gold; both have moved hand in hand, rising and falling together. One is the most typical risk asset, while the other is regarded as a safe-haven asset. Their correlation coefficient has reached an astonishing 0.7.

These three sets of data bring forth one conclusion: gold is no longer part of that logical chain. It rises with US stocks and moves contrary to inflation, exhibiting characteristics of a risk asset, not a safe-haven asset.

The real driving force

Who has transformed gold like this?

There has always been a real demand: emerging country central banks. After the Russia-Ukraine war, the central banks of Poland, Turkey, China, and Brazil began to buy gold on a large scale. This is a genuine strategic reserve demand, not speculation, but a layout for five to ten years. However, central bank purchases of gold are slow-moving; they establish the bottom but are not the major force that drove gold prices from $2,000 to $5,626.

It was the institutions that followed the trend that pushed gold prices up.

They saw the central banks buying and interpreted it as a signal; they heard "de-dollarization" and found the logic impeccable; they watched gold rise steadily and felt that not getting on board was a loss. The non-commercial net long positions, indicative of speculative heat, continued to climb, peaking at nearly double the historical average.

But there lies an even less mentioned structural issue: most of these positions do not correspond to real physical gold.

Today's gold market is no longer a simple logic where buying one gram means keeping one gram in storage. COMEX futures, London OTC markets, gold ETFs, CFD contracts, cryptocurrency gold contracts... various derivatives stacked together, with paper gold’s daily trading volume being dozens of times the annual production of physical gold globally. Some studies estimate that for every ounce of physical gold, the corresponding paper claim could reach dozens. Most of these contracts are settled in cash and never touch real metal.

The margin ratio for futures contracts is typically only 6% to 8% of the contract value, which means a dozen times leverage is commonplace. The London OTC market is even less transparent, with unsecured gold positions established between banks essentially creating paper gold out of thin air.

This structure poses no issues during a bull market, amplifying returns, and everyone is happy. But it buries a time bomb: once the price direction reverses, highly leveraged longs are not choosing to sell but are forced to sell. When margins are insufficient, the system automatically liquidates positions, and the sell-off pressures prices downward, triggering further liquidations—this creates a self-reinforcing spiral, entirely different from retail panic selling.

The shape of a bubble has always been the same: genuine demand provides the base, beautiful stories ignite it, speculative funds rush in, and the derivatives market amplifies the chips tenfold or twentyfold, ultimately pushing prices to a level that genuine demand cannot sustain.

This time, gold is no exception.

War is the fuse, not the killer

Why did gold fall when the war broke out?

Because the war clarified one thing: rate cuts are off the table.

With oil prices exceeding $100, inflationary pressures reignited, and the market has priced in a 50% probability of the Federal Reserve raising rates. The core logic of gold was originally based on betting on a low-interest-rate environment; when rates are low, holding non-interest-bearing gold is worthwhile. Once this logic flips, gold's appeal is cut off at its root.

An increase in the dollar index is a warning sign; since the outbreak of the war, the dollar index has rebounded nearly 2%, with global funds rushing to the dollar, making gold, as a dollar-denominated asset, more expensive for non-US buyers.

And then the 380,000 long positions began to flee.

This time, the exit was not just voluntary; many were forcibly liquidated. As gold prices began to fall, highly leveraged futures accounts first reached the margin alert line, and the system forced liquidations. The sell orders depressed prices, and further decline triggered more liquidations—this spiraled downward, which was entirely different from retail panic selling.

In sync with the drop in stocks and bonds, many investors had to sell gold for cash; another group withdrew money from gold, shifting to bet on the energy sector. Ordinary liquidations, leveraged crashes, and liquidity withdrawals converged at the same exit.

This scene is not unfamiliar. In March 2020, when the pandemic broke out, gold also collapsed sharply; at that time, no one said the logic of gold was broken; everyone understood: In the face of a liquidity crisis, there are no safe-haven assets, only cash. It doesn’t matter what you sell, what matters is that it can be converted into cash. Even the most precious gold must be sold.

The underlying mechanics this time are not fundamentally different from those in March 2020. However, this time, gold carries an additional layer; it is no longer a safe-haven asset; it is a risk asset stuffed with speculative positions and derivative leverage.

The liquidity crisis compounded with leveraged liquidations, striking down with two blades simultaneously.

Two scenarios

How things will proceed next is still unclear; no one can give you a clear answer.

The 380,000 long positions are not fully closed; today, gold has fallen below $4,200; from the price pattern, the bottom is approaching, but there is no reason to see a reversal.

If the war stops, there will be a bounce, but that will undoubtedly provide an opportunity for the stuck positions to unload.

If the war continues, with oil prices not retreating, inflation not retreating, and interest rate hike expectations not retreating, gold will continue to fall.

But history has also provided another script. The oil price shock triggered by the Iranian revolution in 1979 did not lead to a fall in gold; it rose from $226 to $524, ultimately reaching a historical peak in early 1980. The logic then was: With oil prices maintaining high levels for an extended period, stagflation expectations completely destroyed the credibility of the dollar, and funds had nowhere else to go but into gold. If this war drags on, inflation truly spirals out of control, and the Federal Reserve's rate hikes cannot save the economy, this scenario could very well repeat itself.

JPMorgan Chase and Deutsche Bank still maintain a target price of $6,000 to $6,300 by the end of the year.

But one thing is clear, regardless of the scenario: this round of sharp declines has proven that: When a liquidity crisis truly arrives, no asset in the market is inherently immune. Whether gold or bitcoin, the beautifully told stories over the past two years must step aside in the face of "I want cash."

So now gold stands at a true crossroads. On one side is the clearing of bubbles, the end of leveraged liquidations, the exit of speculative funds, and a continued probing for the bottom; on the other side is a war dragging into chronic illness, stagflation expectations crushing everything, and gold reclaiming its place as the "last bastion."

The quiet gold stores in Shuibei, the posts on Xiaohongshu asking "Can I still break even?", and those who use gold as a piggy bank, they haven’t bought the wrong asset.

They just believed in a grander story at the wrong time; black swans always quietly appear when you are the most excited.

The story is not over; we just do not know yet whether it will ultimately be written as a tragedy or a sequel.