The recent “calm” in the gold market has left many observers, and especially the precious metal’s critics, questioning whether the “safe-haven” thesis still stands or whether its time has passed. In the shadow of the ongoing Middle East conflict and the blockade of the Strait of Hormuz, the yellow metal failed to deliver the immediate, parabolic spike that many assumed should accompany a global energy crisis. Instead, we witnessed the opposite, with a correction from the January highs. To the uninitiated, this looks like a failure of gold’s primary purpose. However, a deeper look reveals that this is not a rejection of gold’s fundamentals, but rather a textbook manifestation of the calm before the storm.

The primary driver of this downward pressure is not a lack of conviction, but a desperate and immediate need for cash. When global markets experience a “snap” event, correlations between asset classes tend to temporarily converge. In these moments of acute and widespread stress and uncertainty, institutional investors often find themselves selling not what they want to sell, but what they can sell. As equity and bond markets plummeted, leveraged funds were hit with a wave of margin calls. Having surged significantly in the preceding year, gold became the “piggy bank” that was raided to maintain collateral requirements elsewhere. 

This isn’t a sign of gold’s weakness; far from it. It is in fact the opposite: it is........

© Eurasia Review