Gold plummets for a week! The "1983 Great Sell-off" reappears, Middle East "selling gold to raise funds"?

Gold experienced its worst weekly decline in 43 years this week, sending shivers through the market with echoes of history.

This week, gold's decline marked the largest single-week drop since March 1983, with spot gold prices falling for eight consecutive trading days, the longest losing streak since October 2023. Meanwhile, silver fell more than 15% this week, and both palladium and platinum also declined.

The trigger for this round of plummet was the escalating conflict in the Middle East, which pushed up energy prices and suppressed interest rate cut expectations. Market bets on the Federal Reserve raising interest rates rose to 50%, exacerbating the wave of selling in precious metals.

What makes the market more alert is that the current situation is highly similar to the historic crash in March 1983, which was triggered by a massive sell-off of gold by Middle Eastern oil-producing countries—at that time, OPEC members, facing a sharp decline in oil revenues, were forced to sell gold reserves for cash, causing gold prices to plummet by over a hundred dollars in just a few days.

Notably, historical data shows that this week's decline in gold is the most severe since the "sell gold for financing" storm 43 years ago.

Interest Rate Cut Expectations Collapse, Gold's Safe-Haven Logic Fails

Since the U.S. and Israel launched attacks on Iran last month, gold has been declining for several weeks, which sharply contrasts with its traditional role as a "safe-haven asset."

The reason is that the war has not brought about easing expectations but rather inflationary pressures. Currently, the market's expectations for the Federal Reserve's policy path have fundamentally reversed.

Traders are now betting that the probability of the Federal Reserve raising interest rates before October has risen to 50%. High energy prices are pushing up inflation expectations, while gold, as a non-yielding asset, has significantly decreased in attractiveness 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 began to widen significantly this week, indicating a certain level of dollar financing pressure.

This phenomenon may explain the deeper logic behind the selling of gold—when dollar liquidity tightens, gold is often one of the assets that investors prioritize for liquidation.

It is noteworthy that the most severe declines in the metal market this week occurred during the Asian and European trading sessions, which aligns with the pattern of dollar shortage pressure first manifesting in offshore markets.

Technical Stop-Loss Triggers, Self-Reinforcing Selling

As the decline continues, gold's technical indicators have significantly worsened, with the 14-day Relative Strength Index (RSI) falling below 30, entering a region considered oversold by some traders StoneX Financial analyst Rhona O'Connell pointed out that the current gold pullback is the result of profit-taking and liquidity clearing working together. She stated that the gold price previously attracted a large amount of buying above $5,200, which led to considerable pullback vulnerability in the market.

Once prices began to decline, 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 exacerbated the downward pressure.

Meanwhile, passive selling triggered by the stock market decline also affected 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 continued 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 decreasing by over 60 tons in three weeks.

The Ghost of "Selling Gold for Financing" in the Middle East in 1983

The current situation has led market participants to recall the gold crash 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 suddenly intensified the global oil market's oversupply situation. Faced with a significant reduction in oil revenues, Middle Eastern oil-producing countries (mainly OPEC members) were forced to sell gold reserves on a large scale to raise cash, triggering a gold price avalanche.

Reports from The New York Times at the time confirmed this judgment. According to a March 1, 1983, report from The New York Times, traders explicitly stated that the gold sales by Middle Eastern oil-producing countries were the direct trigger for the sharp decline in gold prices, warning that if oil revenues continued to decline, these Arab countries might sell more gold. At that time, the gold price plummeted by over $105 in less than a week, with a single-day maximum drop of $42.5, the largest in nearly three years.

According to reports from The New York Times at the time, the funds from the Middle Eastern sales immediately flowed into Eurodollars and other short-term investment instruments, leading to a softening of short-term interest rates, which in turn sent warning signals to the global gold market. Since February 21 coincided with the U.S. Presidents' Day holiday, the New York market was closed, and the impact did not fully manifest until the following week, subsequently triggering a chain of forced liquidations, affecting commodity markets such as copper, grains, soybeans, and sugar.

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

Stagflation Clouds Looming, Can Gold Prices Stabilize?

Despite suffering heavy losses this week, gold has still risen about 4% year-to-date. The gold price reached nearly $5,600 per ounce in late January this year, supported by investor enthusiasm, a surge in central bank gold purchases, and concerns about Trump's interference with the independence of the Federal Reserve However, the current macroeconomic 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. The risk of stagflation is rising, severely compressing the policy space for central banks.

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 to the conflict are fading. If the fighting continues, the longer high oil prices persist, the harder it will be for the stock and bond markets to maintain the narrative of "seeing through short-term pain," further exposing the fragility of global assets.

For gold, the trend of real interest rates will be a key variable. If the conflict drags on and inflation expectations continue to heat up, the Federal Reserve's interest rate hike path will become increasingly clear, and gold may continue to face pressure; however, once there are signs of easing in the geopolitical situation, whether the suppressed safe-haven demand can be released again remains the biggest suspense in the market