Gold Crashes in a Week, "1983 Great Sell-off" Returns, Middle East "Selling Gold to Raise Funds"?

The main reasons for the sharp decline include rising oil prices driven by Middle East conflicts, which suppress expectations of rate cuts, combined with tightening dollar liquidity triggering sell-offs.

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

This week, gold’s decline reached the largest weekly drop since March 1983, with spot gold prices falling for eight consecutive trading days, marking the longest streak of declines in 2023 since October. Meanwhile, silver fell over 15%, and palladium and platinum also declined simultaneously.

The trigger for this round of plunge was the escalating Middle East conflict, which pushed up energy prices and further dampened rate cut expectations. Market bets on the Federal Reserve raising interest rates in October increased to 50%, intensifying the wave of precious metal sell-offs.

What’s more alarming is that the current situation closely resembles the historic crash in March 1983, caused by large-scale gold sales by Middle Eastern oil-producing countries—when OPEC members, facing a sharp drop in oil revenues, were forced to sell gold reserves for cash, causing gold prices to plummet over a hundred dollars within days.

Notably, historical data shows that this week’s gold decline is the most severe since the “selling gold to raise funds” 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 fallen for several consecutive weeks, starkly contrasting its traditional role as a “safe-haven asset.”

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

Traders now bet that the Fed has a 50% chance of raising interest rates before October. Elevated energy prices boost inflation expectations, and as gold is a non-yielding asset, its attractiveness diminishes significantly in an environment of rising real interest rates.

Meanwhile, signs of tightening dollar liquidity have emerged. Cross-currency basis swaps have widened noticeably this week, indicating some degree of dollar funding pressure.

This phenomenon may explain the deeper logic behind gold selling—when dollar liquidity tightens, gold is often one of the first assets investors choose to liquidate.

It’s worth noting that the most intense metal market declines this week occurred during Asian and European trading hours, consistent with the pattern that offshore dollar shortages tend to surface first in these markets.

Technical stops triggered, selling self-reinforces

During the ongoing decline, technical indicators for gold have deteriorated sharply, with the 14-day Relative Strength Index (RSI) falling below 30, entering an area some traders consider oversold.

StoneX Financial analyst Rhona O’Connell pointed out that this correction is the result of profit-taking and liquidity liquidation. She noted that gold had previously attracted substantial buying above $5,200, creating a significant vulnerability to further declines.

Once prices start falling, a large number of stop-loss orders are automatically triggered, causing rapid sell-offs that reinforce the downward spiral. Technical signals like moving averages further exacerbate the downward pressure.

At the same time, passive selling triggered by stock market declines has also impacted gold.

O’Connell mentioned that forced liquidations related to stock assets may have dragged down gold prices, while central banks slowing gold purchases and continued outflows from gold ETFs further suppressed market sentiment. According to Bloomberg, gold ETF holdings have been outflows for three consecutive weeks, decreasing by over 60 tons in total.

The ghost of the 1983 Middle East “selling gold to raise funds”

The current situation inevitably reminds market participants of the gold crash triggered by the oil crisis 43 years ago.

Historical records show that around February 21, 1983, UK and Norwegian oil producers led a price cut, forcing OPEC to follow suit, which sharply increased global oil oversupply. Facing a drastic decline in oil revenues, Middle Eastern oil-producing countries (mainly OPEC members) were forced to sell large amounts of gold reserves to raise cash, triggering a gold price collapse.

The New York Times confirmed this view. On March 1, 1983, it reported that traders identified the selling of gold by Middle Eastern oil producers as the direct trigger for the sharp decline in gold prices, warning that further drops in oil revenues could lead these Arab countries to sell more gold. Within less than a week, gold prices plummeted over $105 from the high, with a single-day drop of $42.5—the largest in nearly three years.

According to the Times, the proceeds from Middle Eastern sales flowed into European dollars and other short-term investments, causing short-term interest rates to soften and sending a warning signal to the global gold market. Since February 21 coincided with the US Presidents’ Day holiday and the New York market was closed, the impact only fully manifested the following week, triggering chain forced liquidations that also affected copper, grains, soybeans, sugar, and other commodities.

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

Clouds of stagflation loom, can gold prices stabilize?

Despite the heavy blow this week, gold has still gained about 4% year-to-date. In late January, gold touched a record high of nearly $5,600 per ounce, supported by investor enthusiasm, central bank gold buying, and concerns over Trump’s interference with the Fed’s independence.

However, the macro environment has significantly worsened. According to Bloomberg, Goldman Sachs economist Joseph Briggs expects rising energy prices to drag global GDP down 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 has increased, severely limiting central bank policy space.

Goldman analyst Chris Hussey noted that the Strait of Hormuz blockade has entered its fourth week, and hopes for a quick resolution are fading. If the conflict persists, the longer oil prices stay high, the more difficult it will be for the narrative that “short-term pain will be seen through” in stocks and bonds to hold, exposing further vulnerabilities in global assets.

For gold, the trajectory of real interest rates will be a key variable. If the conflict prolongs and inflation expectations continue to rise, the Fed’s rate hike path will become clearer, putting continued pressure on gold; conversely, if geopolitical tensions ease, the potential for a renewed safe-haven demand remains the biggest market uncertainty.