On March 23, spot gold fell to $4,100 intraday, erasing the entire year’s gains.

Looking back 57 days ago, gold stood at the historical peak of $5,600. From the highest point to the present, it has dropped more than 27%. This is the most tragic decline for gold since 1983.

I still remember that on January 29, there were countless analysts around the world shouting "gold will break 6,000." Unexpectedly, a massacre ushered in.

Gold is long, no one survives.

Those people on Xiaohongshu who once showed off gold bars, showed off their achievements and posted selfies are now "wailing all over the place".

The epicenter of everything is in the Middle East. The US-Israeli attack on Iran has entered its 24th day. The Strait of Hormuz has been closed, oil prices have exceeded 100, and the war is getting more intense.

War should push up gold. This is common sense accumulated by mankind over thousands of years. But this time, common sense failed.

Many people attribute the reasons to interest rates, the US dollar, stop-loss orders... These are all correct, but the real problem may be: when a crisis strikes, what institutions want is not preservation of value, but liquidity.

The gold you bought is no longer the gold you thought it was.

Isn’t gold a “safe haven asset”?

In the past three years, gold has risen from less than $2,000 to all-time highs, with a cumulative increase of more than 150%.

In the process of rising, the market has always had a set of ready-made explanations, such as risk aversion in troubled times, the collapse of US dollar credit, the increase of reserves by central banks of emerging countries, and de-dollarization... Each of them makes sense when taken individually, and is quite encouraging when spoken about.

But this explanation cannot withstand data verification.

From 2021 to 2022, when inflation in the United States is the most fierce, gold has fallen for two consecutive years. After 2023, inflation gradually cools down and gold begins to soar. There is a strong negative correlation between the two. In other words, the higher the inflation, the more gold will fall; the lower the inflation, the more gold will rise. The phrase "buy gold to fight inflation" has been a contrarian indicator in the past three years.

The Federal Reserve’s real interest rates have remained high in the past three years, and the iron law in the textbook that “high interest rates suppress gold prices” has quietly failed.

What is even more intriguing is the relationship between U.S. stocks and gold. The two almost go hand in hand, rising and falling together. One is the most typical risk asset and the other is called a safe-haven asset, and their correlation coefficient reaches an astonishing 0.7.

Putting these three sets of numbers together, there is only one conclusion: gold is no longer in that logical chain. It rises together with the US stock market and goes against inflation. What it shows is the characteristics of a risky asset, not a safe-haven asset.

The real promoter

Who transformed gold into this?

There is a real need that persists: emerging country central banks. After the Russo-Ukrainian War, the central banks of Poland, Turkey, China, and Brazil began to purchase gold on a large scale. This was a real demand for strategic reserves, not speculation, but a five- to ten-year plan. But the central bank’s gold buying is slow action. It sets the bottom, but it is not the main force that drives the gold price from 2,000 to 5,626.

What pushed up the price of gold was the group of institutions that followed the trend.

They see the central bank buying and think it is a signal; they hear "de-dollarization" and think the logic is impeccable; they see gold rising all the way and think it is a loss if they don't get on board. Non-commercial net long positions, a proxy for speculative enthusiasm, continued to rise, peaking at nearly twice the historical average.

But there is also a structural problem that is rarely mentioned: most of these positions have no corresponding physical gold at all.

Today's gold market is no longer a simple logic where you buy one gram and put one gram in the warehouse. COMEX futures, London OTC over-the-counter market, gold ETFs, CFD contracts, currency gold contracts... all kinds of derivatives are superimposed, and the daily trading volume of paper gold has long been dozens of times the annual production of global physical gold. Some studies estimate that for every ounce of physical gold on the market, there may be dozens of paper claims. The vast majority of these contracts are settled in cash and do not touch actual metal at all.

The margin ratio for futures contracts is usually only 6% to 8% of the contract value, which means that leverage of more than ten times is the norm. The London OTC market is even more opaque. The unsecured gold positions opened between banks are essentially book gold created out of thin air.

This structure has no problem in a bull market. Leverage magnifies returns and everyone is happy. But it planted a time bomb: once the price direction reverses, the highly leveraged bulls will not choose to sell, but will be forced to sell. If the margin is not enough, the system will automatically close the position, leaving no room for negotiation.

The shape of a bubble always looks the same: real demand is at the bottom, beautiful stories are ignited, funds rush in to chase the price, the derivatives market enlarges the chips ten to twenty times, and finally pushes the price to a position that real demand cannot support at all.

Gold this time is no exception.

War is the lead, not the murderer

War is coming, why does gold fall?

Because the war made one thing clear: there is no chance of cutting interest rates.

Oil prices have exceeded 100, inflationary pressure has reignited, and the probability of the Federal Reserve raising interest rates has been priced in by the market to 50%. The original core logic of gold is to bet on a low interest rate environment. If interest rates are low, it is cost-effective to hold gold that does not pay interest. Once this logic is reversed, the appeal of gold will be fundamentally broken.

The rise in the U.S. dollar index is a danger signal. Since the outbreak of the war, the U.S. dollar index has rebounded by nearly 2%. Global funds are running towards the U.S. dollar. Gold, as a U.S. dollar-denominated asset, has become more expensive for non-U.S. buyers.

Then the 380,000 longs started running.

But this time, the escape was not just a voluntary retreat, but also a forced liquidation. When the price of gold began to fall, highly leveraged futures accounts first hit the margin warning line, and the system forced liquidation. The orders sold pushed down the price. The drop in price triggered more liquidations, and new selling drove down the price again. This is a self-reinforcing spiral, which is completely different from the panic selling of retail investors.

Stocks and bonds fell simultaneously, and a large number of investors had to sell gold for cash; another group of people took their money away from gold and transferred it to the energy sector. Ordinary position liquidation, leveraged position liquidation, and liquidity withdrawal, the three forces are rushing to the same exit at the same time.

This scene is not unfamiliar. When the epidemic broke out in March 2020, gold also experienced a flash crash. At that time, no one said that the logic of gold was broken. Everyone knew clearly: in the face of a liquidity crisis, there are no safe-haven assets, only cash. It doesn't matter what you sell, what matters is that you can convert it into cash. No matter how precious gold is, it must be sold.

The underlying mechanism this time is not fundamentally different from March 2020. But this time, there is an extra layer of pressure on gold. It is no longer a safe-haven asset. It is a risky asset filled with speculative positions and derivatives leverage.

Liquidity crisis overlaps with leverage liquidation, and two knives fall together.

Two scripts

No one can give you a clear answer on what to do next.

The 380,000 long positions have not been closed. Gold fell below $4,200 today. Judging from the price pattern, the bottom is approaching, but there is no reason for a reversal.

If the war stops, there will be a rebound, but it will undoubtedly give the hold-up market an opportunity to ship.

If the war continues, if oil prices do not recede, inflation does not recede, and expectations of interest rate hikes do not recede, gold will continue to fall.

But history has also given another script. During the oil price shock triggered by the Iranian revolution in 1979, gold did not fall. It rose from $226 to $524, finally hitting its historical peak in early 1980. The logic at that time was: oil prices remained high for a long time, and expectations of stagflation completely destroyed the credit of the US dollar. Funds had nowhere to go but to pour into gold. If this war is protracted and inflation really gets out of control, the Fed's interest rate hikes will not be able to save the economy. This path is not impossible to repeat.

JPMorgan Chase and Deutsche Bank still maintain year-end target prices of $6,000 to $6,300.

But one thing, no matter which script is used, this round of plummeting has proven: when the liquidity crisis really comes, no asset in the market is inherently immune. Be it gold or Bitcoin, all the good stories that have been told in the past two years have to stand aside in front of the four words "I want cash."

So gold now stands at a real fork in the road. On one side, the bubble has cleared, leverage liquidation has ended, speculative funds have left the market, and gold prices have continued to hit bottom; on the other side, war has become a chronic disease, stagflation expectations have overwhelmed everything, and gold has regained its position as the "last fortress."

Those quiet gold shops in Shuibei, those posts on Xiaohongshu asking "Can I still get my money back?", and those who use gold as a piggy bank, in fact, they did not buy the wrong asset.

They just believed in a bigger story at the wrong time. Black swans always come quietly when you are most excited.

The story is not over yet, but we still don’t know yet whether it will be written as a tragedy or a sequel.