Gold plunges in a week, "the 1983 great sell-off" reappears, Middle East "selling gold to raise funds"?

Gold suffered its worst weekly decline in 43 years this week, sending chilling echoes through the market.

This week, gold recorded its largest weekly drop since March 1983, with spot prices falling for eight consecutive trading days, marking the longest losing streak since October 2023. Meanwhile, silver plummeted over 15% this week, with palladium and platinum also declining in tandem.

The trigger for this plunge was the escalating conflict in the Middle East, which pushed up energy prices and dampened expectations of interest rate cuts. The market's bets on a Federal Reserve rate hike surged to 50%, intensifying the wave of precious metal sell-offs.

What is even more alarming for the market is the striking resemblance of the current situation to the historic collapse in March 1983, triggered by large-scale gold selling from Middle Eastern oil-producing nations—back then, OPEC member countries, hit by a sharp drop in oil revenues, were forced to liquidate their gold reserves for cash, causing gold prices to plummet by over $100 within days.

Notably, historical data shows that this week’s decline in gold was the most severe since the 'gold-for-cash' storm 43 years ago.

Since the US and Israel attacked Iran last month, gold has been falling for several weeks, sharply contrasting with its traditional role as a 'safe-haven asset.'

The reason lies in the fact that war brought not easing expectations but inflationary pressure. At present, the market's forecast for the Federal Reserve's policy path has undergone a fundamental reversal.

Traders are now betting that the probability of the Federal Reserve raising interest rates before October has risen to 50%. High energy prices are driving up inflation expectations, and gold, as a non-interest-bearing asset, has seen its appeal significantly diminish in an environment of rising real interest rates.

At the same time, there are signs of tightening dollar liquidity in the current market. Cross-currency basis swaps have widened significantly this week, indicating some degree of pressure in dollar funding.

This phenomenon may help explain the deep logic behind the sell-off in gold—when dollar liquidity tightens, gold is often one of the assets that investors liquidate first.

Notably, the sharpest declines in the metals market this week occurred during the Asian and European trading sessions, consistent with the pattern of dollar shortages first emerging in offshore markets.

Amid the ongoing decline, gold's technical indicators have deteriorated significantly, with the 14-day Relative Strength Index (RSI) falling below 30, entering a zone considered oversold by some traders.

StoneX Financial analyst Rhona O'Connell pointed out that this round of gold correction is the result of both profit-taking and liquidity-driven unwinding. She noted that gold attracted substantial buying above $5,200, creating significant vulnerability for a pullback.

Once prices began to fall, a large number of investors' stop-loss orders were automatically triggered, quickly forming a self-reinforcing spiral of selling. Technical signals such as moving averages further intensified downward pressure.

Meanwhile, passive selling triggered by stock market declines also spilled over into gold.

O'Connell noted that forced liquidation linked to equity assets likely weighed on gold prices, while a slowdown in central bank gold purchases and continued outflows from gold ETFs further dampened market sentiment. According to Bloomberg data, gold ETFs have recorded net outflows for three consecutive weeks, with holdings decreasing by more than 60 tons over the period.

The current situation has inevitably reminded market participants of the gold market collapse triggered by the oil crisis 43 years ago.

Historical data shows that around February 21, 1983, British and Norwegian oil producers were the first to cut prices, putting pressure on OPEC to follow suit, which abruptly intensified the global oil market's oversupply. Faced with a sharp decline in oil revenues, Middle Eastern oil-producing countries (mainly OPEC members) were forced to sell off large amounts of their gold reserves to raise cash, triggering an avalanche in gold prices.

Reports from The New York Times at the time confirmed this assessment. According to The New York Times report on March 1, 1983, traders explicitly stated that the dumping of gold by Middle Eastern oil-producing countries was the direct trigger for the sharp drop in gold prices and warned that if oil revenues fell further, these Arab countries might sell more gold. At that time, the gold price plunged over $105 from its peak within less than a week, with the largest single-day drop reaching $42.5, the most severe in nearly three years.

According to reports by The New York Times at the time, funds obtained from Middle Eastern sales immediately flowed into Eurodollars and other short-term investment instruments, causing short-term interest rates to soften, thereby sending a warning signal to the global gold market. As February 21 coincided with Presidents' Day in the US, the New York market was closed, and the full impact did not appear until the following week, subsequently triggering a chain reaction of forced liquidations, affecting commodity markets such as copper, grains, soybeans, and sugar.

ZeroHedge pointed out that the gold market collapse of 1983 marked the beginning of a multi-year bear market cycle for the oil market—OPEC discipline weakened, market share continued to erode, and oil prices remained under pressure throughout the 1980s.

Despite being hit hard this week, gold has still risen approximately 4% year-to-date. In late January this year, gold prices reached a historical high of nearly $5,600 per ounce, supported by investor enthusiasm, central bank gold purchases, and concerns about Trump's interference in the Federal Reserve's independence.

However, the current macro environment has significantly deteriorated. According to Bloomberg, Goldman Sachs economist Joseph Briggs expects that rising energy prices will drag down global GDP by 0.3 percentage points over the next year and push overall inflation up by 0.5 to 0.6 percentage points. Rising risks of stagflation severely compress central banks' policy space.

Goldman Sachs analyst Chris Hussey noted that the blockade of the Strait of Hormuz has entered its fourth week, and hopes for a quick resolution to the conflict are fading. If the conflict continues, the longer oil prices remain elevated, the harder it will be for the narrative of 'looking past short-term pain' in stock and bond markets to hold, exposing further vulnerabilities in global assets.

For gold, movements in real interest rates will be a key variable. If the conflict drags on and inflation expectations continue to rise, the Federal Reserve’s path to rate hikes will become increasingly clear, potentially prolonging pressure on gold. However, whether suppressed safe-haven demand can be re-released remains the biggest question mark for the market once signs of easing geopolitical tensions emerge.

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