Original title: "Gold Plummets for a Week! Is the '1983 Mass Sell-off' Reappearing, with the Middle East 'Selling Gold for Funding'?"
Original author: Dong Jing, Wall Street News
This week, gold experienced the steepest weekly decline in 43 years, with echoes of history sending chills through the market.
This week, the drop in gold prices marked the largest single-week decline since March 1983, with spot gold prices falling for eight consecutive trading days, setting the longest losing streak since October 2023. Meanwhile, silver fell by more than 15% this week, and palladium and platinum also declined simultaneously.
The trigger for this round of plummeting prices has been the escalating conflict in the Middle East, which has raised energy prices and suppressed expectations of interest rate cuts. Market bets on a Federal Reserve interest rate hike rose to 50%, intensifying the wave of selling in precious metals.
What makes the market more alert is that the current situation closely resembles the historic collapse caused by the mass gold sell-off by Middle Eastern oil-producing countries in March 1983—back then, OPEC members, facing a sharp drop in oil revenues, were forced to sell their gold reserves for cash, leading to a plunge in gold prices of over $100 within days.
Notably, historical data shows that this week's decline in gold is the most severe since the 'selling gold for funding' storm 43 years ago.
Expectations of rate cuts collapse, gold's safe-haven logic fails
Since the US and Israel launched attacks on Iran last month, gold has seen several weeks of declines, starkly contrasting its traditional role as a 'safe-haven asset.'
The reason is that war does not bring expectations of easing but rather inflationary pressures. Currently, the market's expectations regarding the Fed's policy path have fundamentally reversed.
Traders are now betting that the probability of a Fed rate hike before October has risen to 50%. Elevated energy prices are driving inflation expectations higher, and gold, as a non-yielding asset, has seen its appeal diminish significantly in an environment of rising real interest rates.
Meanwhile, signs of tightening dollar liquidity have emerged in the current market. Cross-currency basis swaps widened significantly this week, indicating a degree of pressure in dollar financing.
This phenomenon may explain the deeper logic behind the gold sell-off—when dollar liquidity tightens, gold is often one of the assets investors prioritize for liquidation.
It's noteworthy that the most severe declines in the metals market this week occurred during Asian and European trading hours, aligning with the pattern of dollar shortage pressures first manifesting in offshore markets.
Technical stop-loss triggers, self-reinforcing sell-off
As the decline continues, gold's technical indicators have deteriorated significantly, with the 14-day relative strength index (RSI) dropping below 30, entering a zone considered oversold by some traders.
StoneX Financial analyst Rhona O'Connell pointed out that this round of gold pullback is the result of profit-taking and liquidity clearing. She noted that significant buying pressure had built up in the market when gold was above $5200, creating considerable vulnerability for a pullback.
Once prices began to decline, large numbers of investors' stop-loss orders were automatically triggered, rapidly forming a self-reinforcing spiral of selling. Technical signals such as moving averages further intensified the downward pressure.
Meanwhile, passive sell-offs triggered by falling stock markets have also impacted gold.
O'Connell noted that forced liquidations related to equity assets may have weighed on gold prices, while a slowdown in central bank gold purchases and persistent fund outflows from gold ETFs further suppressed market sentiment. According to Bloomberg data, gold ETFs have recorded net outflows for three consecutive weeks, with total holdings reduced by over 60 tons in three weeks.
The ghost of the 1983 Middle East 'selling gold for funding'
The current situation leads market participants to inevitably recall the gold collapse triggered by the oil crisis 43 years ago.
Historical data indicates that around February 21, 1983, British and Norwegian oil producers initiated price cuts, putting pressure on OPEC to follow suit, dramatically worsening the global oil market's oversupply situation. Facing a significant shrinkage in oil revenue, Middle Eastern oil-producing countries (mainly OPEC members) were forced to sell off their gold reserves on a large scale to raise cash, triggering an avalanche in gold prices.
A report from The New York Times at that time confirmed this assessment. According to a March 1, 1983, report from The New York Times, traders explicitly stated that the gold sell-off by Middle Eastern oil-producing countries was the direct ignition for the plummeting gold prices, warning that if oil revenues continued to decline, these Arab countries might sell even more gold. At that time, gold prices fell by over $105 from their highs in less than a week, with a single-day maximum drop of $42.5, the largest in nearly three years.
The then report from The New York Times mentioned that the funds generated from the Middle Eastern sell-off immediately flowed into Eurodollars and other short-term investment instruments, leading to a softening of short-term interest rates and sending warning signals to the global gold market. As February 21 coincided with the Presidents' Day holiday in the United States, the New York market was closed, and the impact was not fully felt until the following week, subsequently triggering a chain of forced liquidations affecting copper, grains, soybeans, sugar, and other commodity markets.
ZeroHedge pointed out that the gold collapse in 1983 marked the beginning of a multi-year bear market in the oil market—OPEC's discipline frayed, market shares continued to be lost, and oil prices remained under pressure throughout the 1980s.
Stagflation clouds loom, can gold prices stabilize?
Despite suffering heavy losses this week, gold has still accumulated an increase of about 4% since the beginning of this year. In late January, gold prices reached a historic high of nearly $5600 per ounce, supported by investor enthusiasm, a surge in central bank gold purchases, and concerns about Trump's interference in the independence of the Fed.
However, the current macro environment has significantly deteriorated. According to Bloomberg, Goldman Sachs economist Joseph Briggs expects that the rise in energy prices will drag down global GDP by 0.3 percentage points over the next year and raise overall inflation by 0.5 to 0.6 percentage points. The risk of stagflation is rising, severely constraining the central bank's policy space.
Goldman Sachs analyst Chris Hussey pointed out that the blockade of the Strait of Hormuz has entered its fourth week, and hopes for a quick resolution of the conflict are fading. If the conflict continues and high oil prices last longer, the narrative that the stock and bond markets can 'see through short-term pain' will become increasingly difficult to sustain, further exposing the vulnerabilities of global assets.
For gold, the trends in real interest rates will be a key variable. If the conflict drags on and inflation expectations continue to rise, the Fed's path towards rate hikes will become increasingly clear, and pressure on gold may persist; however, if there are signs of easing in geopolitical tensions, whether suppressed safe-haven demand can be released remains the biggest uncertainty in the market.
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