Why is gold falling despite geopolitical instability?

Gold is often considered a safe haven for investors, especially in the context of geopolitical instability. However, since the Middle East conflict erupted on February 28th, the price of the precious metal has fallen by 11%.

This result seems to defy all conventional economic principles, as safe-haven assets should appreciate in value during times of global instability.

However, Forbes , citing a new research report from LPL Financial – one of the largest independent brokerage firms in the US, with client assets totaling $2.3 trillion – suggests that this sell-off is not a sign of failure.

According to Kristian Kerr, Head of Macro Strategy at LPL Financial, instead of simply serving as a safe haven, gold is now fulfilling a different function, acting partly as a commodity, partly as a reserve asset, and, during periods of stress, as an alternative to the US dollar.

Many Gulf nations, led by the United Arab Emirates (UAE), are facing pressure from a shortage of US dollar-denominated capital after the closure of the Strait of Hormuz paralyzed the flow of oil, reducing oil exports and tanker traffic.

Oil sales and exports bring in USD. A drop in sales means a decrease in the amount of USD flowing into the Gulf region. And when payments are due, governments need liquidity more than store-of-value assets.

Türkiye is a prime example. Faced with increasing pressure on the lira following the energy shock, the country's central bank had to sell and swap $3 billion worth of gold reserves in just one week in March to stabilize the market.

This helps explain the unusual weakening of gold prices . Normally, geopolitical tensions would drive individual investors to gold, but when governments and central banks urgently need cash, gold becomes an alternative source of capital.

Expert Kristian Kerr warns that downward pressure on prices may not be over yet. After being impacted by energy disruptions, governments will prioritize rebuilding fuel supplies, stabilizing budgets, and replenishing foreign exchange reserves – all of which require USD.

The recent decline in gold prices doesn't necessarily mean investors have lost confidence in the precious metal. However, the price drop suggests that some of the world's largest gold holders are now more in need of cash than asset protection. And for an asset expected to provide financial flexibility during crises, gold is fulfilling its intended role.

Quang Trung

Source: https://baoninhbinh.org.vn/vi-sao-vang-giam-du-bat-on-dia-chinh-tri-260518090110130.html