(Bloomberg) — Opportunistic buyers are starting to emerge in the gold market after the biggest selloff in years, helping to keep bullion’s record-breaking three-year bull run intact.
Gold prices have fallen by 15% this month, creating a test of faith for gold bulls. That’s left some questioning the precious metal’s safe-haven credentials as the Iran war threatens to upend the global economy.
The meltdown has come as a broader selloff across stocks, bonds and currencies prompted investors to sell bullion to cover losses elsewhere. Turkey has also been offloading its holdings to support its currency and, while its sales weren’t the only drag on prices, there are worries that as the war intensifies a broader cohort of central banks could start selling.
The price of bullion slumped 19% from its January closing peak to the end of trading Thursday — nearing the 20% threshold that conventionally marks the start of a bear market. But by Friday investors stepped back in, driving prices about 3% higher as some money managers and banks insist that the underlying drivers of swollen government debts and a fractured geopolitical landscape are still in place.
The correction is a “buying opportunity” once tensions in the Middle East subside, said Fidelity International money manager George Efstathopoulos. “Inflation risks, fiscal pressures, and bond credibility are all still structural tailwinds for gold.”
Gold’s nearly 150% rally since the beginning of 2023 was kicked off by central banks, who started buying more after the freezing of Russia’s foreign exchange reserves highlighted the danger of having all their assets in the dollar basket. Hedge funds soon piled in, followed by a wave of retail buyers.
“There’s been basically half a year of really crazy buzz and that has to have sucked in a lot of people,” said Robin Brooks, a former FX strategist with Brevan Howard and Goldman Sachs Group Inc. who is now a senior fellow at the Brookings Institution. That set the scene for the selloff the market is experiencing now, he said.
Adding to the headwinds for gold, analysts have also pointed to the likelihood of the Iran war triggering central bank gold sales, or at least slowing purchases. Some states that have been accumulating bullion are energy importers, so a steeper oil and gas bill means fewer dollars retained to be recycled into gold.
One of those was Turkey, which sold and swapped more than $8 billion worth of gold in two weeks after the start of the Iran war, in a bid to protect the lira. Banks often swap gold for currencies while simultaneously agreeing to buy it back later, and that accounted for most of the activity.
