TUMBLING GOLD PRICE PUYS "HAVEN" STATUS IN DOUBT / THE FINANCIAL TIMES

Tumbling gold price puts ‘haven’ status in doubt

Margin calls force some investors to sell, but analysts say precious metal will rebound even as Iran war fallout endures

Camilla Hodgson in London

Gold has erased most of its gains for the year since the US-Israeli bombardment of Iran began on February 28 © Damian Lemanski/Bloomberg

The price of gold has tumbled more than 15 per cent since the start of the Iran war, in a dramatic market rout that has raised questions over the precious metal’s perceived role as a haven asset.

Gold is typically seen as a beneficiary of geopolitical uncertainty, and for the first 10 days of the Middle East conflict it broadly held its prewar value even as stocks and bonds sold off.

But the precious metal has since been caught up in the turmoil that has upended markets during the war, as investors eager to raise funds to cover losses elsewhere cash in their gains after the metal’s storming two year rally.

Rhona O’Connell, an analyst at financial services firm StoneX, said investors should not “fall into the ‘safe haven’ trap”.

“Gold almost invariably comes down during equities and Treasuries meltdowns, as investors cash it in to raise funds,” she added.

Jason Turner of private German bank Berenberg said data from hedge funds and brokers suggested financial institutions had been “liquidating profitable bullion positions to cover margin calls [when brokers demand additional collateral from investors] in the equity and bond markets”.

Data group Vanda estimates that global gold ETFs have seen outflows of about $10.8bn since the start of the war.

There has also been broad speculation among analysts that central banks may look to sell some of their gold holdings to raise funds, although this is yet to show up in official data.

This month, the governor of Poland’s central bank considered selling or revaluing part of its gold reserves to cover defence spending. 

HSBC analysts noted that high oil prices, geopolitical risks and the potential revenues offered by still high gold prices “may encourage further official sector selling”.

The price of gold hit a series of highs from early 2024, peaking at a record $5,594 per troy ounce in January as investors flooded in. 

But after briefly stumbling and rebounding in February, the rally sharply reversed from the middle of March.

The gold price has fallen 16 per cent since the US-Israeli bombardment began on February 28, erasing most of its gains for the year. 

The price was broadly flat on Tuesday at about $4,400 an ounce — still a historically high level despite the March sell-off — after US President Donald Trump suggested on Monday that the war might be over soon.

As a result of the conflict, there had been “big profit-taking, risk reduction and deleveraging taking place”, said John Reade, market strategist at the World Gold Council, which represents gold miners.

As speculative investors became more dominant in the sector last year — rather than other traditional drivers of demand such as the jewellery sector — the gold price had become more volatile and was likely to remain so, he added.

“Gold’s role as a portfolio diversifier and risk mitigator has been somewhat undermined by the volatility of the last few weeks,” said Reade.

The expectation of higher interest rates, as central banks seek to curb the war’s inflationary impact, has also helped to depress the gold price, analysts said.

“Gold and silver are phenomenally sensitive to interest rate expectations,” said Adrian Ash, director of research at online trading platform BullionVault. 

“Everybody was saying, ‘when will gold be correlated with real rates again’ — the answer is now.”

Rising interest rates lead to higher bond yields, making bonds a more attractive prospect to some investors than gold, which pays no interest.

Many analysts expect gold price volatility to remain high and the economic damage from the conflict to endure, even if Trump delivers his promised early end to the war.

But some expect the gold price to rally again, even as the fallout from war goes on.

BMO analysts said on Tuesday that they expected gold to recover “much” of its conflict losses “once risk appetite returns”.

Ash at BullionVault noted that in the immediate “shock and panic phase” of the 2008 financial crisis, the gold price had fallen.

But it then rebounded: gold was “seen to be the perfect asset for the financial crisis — and it was, in the long term”.