Gold has fallen 10% in a single week, marking its largest weekly decline in 43 years. Surprisingly, when risks truly materialized, this traditional safe-haven asset dropped even more sharply than A-shares. If you're wondering where the bottom for gold lies, there is no clear answer. Currently, gold is facing a liquidity crisis, and speculating on the bottom is futile. However, if you wish to understand the risks of further short-term deterioration and potential future turning points, reading this article will provide valuable insights.

Conventional wisdom suggests that gold is a safe-haven asset, and with conflict in the Middle East, its price should rise. So why has it fallen more severely as tensions escalate? The key factor influencing gold prices currently is oil prices, not the war itself. Had the conflict not affected the Strait of Hormuz, gold would not have suffered so significantly.

**01 Liquidity Crisis Triggered by High Oil Prices** The recent global sell-off occurred after oil prices surged above $100 per barrel, as high oil prices have sparked a liquidity crisis. A liquidity crisis can be simply understood as "acute blood loss" in financial markets: there are far more sellers than buyers willing to step in, making it difficult to liquidate assets without significant price discounts.

How did this unfold? ① Interest Rate Expectations Rising oil prices fuel inflation, which may prevent the Federal Reserve from cutting interest rates, as doing so could exacerbate inflationary pressures. Initially, markets anticipated two to three rate cuts this year, but now discussions have shifted to whether the Fed might hike rates in the fourth quarter if oil prices remain elevated. Higher interest rates strengthen the U.S. dollar, causing gold—denominated in dollars—to weaken. While this is a contributing factor, it alone does not fully explain the liquidity crisis, as the dollar index has frequently breached 100 during gold's multi-year rally without triggering such a sharp decline.

② Relative Value Prior to the conflict, gold had already experienced substantial gains, while oil remained relatively undervalued. Capital tends to flow toward cheaper assets, so during the initial phase of the conflict, funds moved into more attractively priced oil, coal, and chemical assets rather than precious metals.

③ Profit-Taking Many may have forgotten that gold's current bull run began in October 2022, lasting 40 months until the recent crash. With gold reaching an unprecedented $5,500 per ounce, substantial profits have been realized. As prices decline, some investors may lose conviction and cash out, exacerbating the downturn.

④ Liquidity Curse Amid a broad-based sell-off across commodities, equities, and bonds, institutional and large investors—often leveraged—face margin calls. They may sell gold not because it is fundamentally weak, but because it is highly liquid and easier to offload quickly. This phenomenon is known as the "liquidity curse." In such conditions, market logic breaks down, making it impossible to predict when the decline will end.

**02 Short-Term Risks** Gold's near-term risks stem from external factors rather than its own fundamentals. Even if gold's underlying logic remains sound, its price stability depends on broader market conditions. If the conflict shows no signs of resolution and oil prices stay high through April, fears of an economic recession could trigger further panic selling across asset classes. In this scenario, gold would suffer collateral damage—"when the city gate catches fire, the fish in the moat suffer."

**03 Long-Term Turning Points** ① While the conflict may persist, oil prices could moderate After three weeks of U.S.-Iran tensions, markets are realizing that a quick resolution is unlikely, as both sides have significant stakes. However, neither party benefits from sustained high oil prices. For the U.S., elevated oil prices risk stagflation, which the administration would want to avoid. For Iran, high oil prices are a bargaining chip, not an end goal. If oil prices spiral out of control, damaging global demand, Iran—as an oil producer—would also suffer. If oil prices stabilize, markets could refocus on potential rate cuts, easing liquidity pressures on gold.

② Recession may pave the way for monetary easing While short-term attention is on inflation, the longer-term trend points toward economic slowdown. Unless inflation surges uncontrollably, the Fed is likely to cut rates if the economy weakens or financial risks emerge. Historically, gold has performed well during periods of Fed quantitative easing (QE).

③ High oil prices cannot掩盖 the dollar's decline Whether oil prices retreat, the Fed launches QE, or geopolitical tensions ease, any of these developments could mark a new downturn for the dollar. A weaker dollar would, in turn, bolster gold.

It is crucial to maintain realistic expectations regarding the timing and magnitude of any potential turnaround. Avoid guessing when the shift will occur or how high gold might rise. Markets are unpredictable; what matters is preparedness. The meaningful questions are: Does your portfolio positioning provide the resilience to endure until conditions improve? If you exit prematurely, can you accept the outcome? And if the rebound arrives, will it illuminate a sustainable path for your wealth management strategy?