ETF outflows, leverage unwinding, and liquidity stress drove a sharp decline in gold prices.
Dubai: Gold’s sharp decline in March surprised investors, as geopolitical tensions and inflation risks would normally have supported prices. However, the drop was driven less by fundamentals and more by a rapid unwind of leveraged positions across financial markets.
According to the World Gold Council’s Gold Market Commentary: Anatomy of a Fall, bullion fell 12% during the month to $4,608 an ounce, marking its weakest performance since June 2013. The decline was seen across all major currencies, even though gold remains higher year-to-date.
The magnitude and speed of the drop suggest it was driven by liquidity pressures rather than any change in gold’s long-term fundamentals.
Deleveraging takes centre stage
Gold’s decline unfolded over the first three weeks of March in what the World Gold Council describes as a counterintuitive yet familiar pattern during periods of market stress.
“Gold is not a contractual hedge. Prices rise only when incremental buyers exceed sellers,” the report noted, highlighting the mechanics behind the move.
That balance shifted sharply as investors rushed to raise cash. Global gold ETFs saw $12 billion in outflows, led by North America, while COMEX net long positions also fell, reflecting a broad reduction in exposure among both institutional and retail investors.
Retail positioning built up in previous months also unwound, with non-reportable positions declining alongside managed money holdings. Commodity Trading Advisors (CTAs), who entered March with heavy long exposure, intensified selling once key technical levels were broken.
Meanwhile, stress in other asset classes spilled over into gold. Weakness in equity markets and elevated margin requirements triggered cross-asset deleveraging, forcing multi-asset investors to reduce positions to meet liquidity needs.
Bond yields and dollar add pressure
Rising U.S. bond yields intensified the sell-off, particularly at the short end of the curve, where inflation concerns pushed two-year yields and breakeven rates sharply higher.
The U.S. dollar also strengthened during the period, though the World Gold Council notes its impact was secondary. Instead, momentum-driven selling—amplified by technical triggers and liquidity stress—played a larger role than macroeconomic fundamentals.
Speculation over central bank activity added another layer of pressure. Türkiye’s use of around 50 tonnes of gold as collateral through swaps fuelled market chatter, although the move was driven by liquidity management rather than any strategic shift.
Middle East impact limited
Regional disruptions, including travel constraints and softer tourist demand, had only a marginal effect on global gold pricing.
The report notes that while jewellery demand and small-bar purchases weakened in parts of the Middle East, the scale was not large enough to influence international markets. Trading volumes in Dubai rose during the period but remained too small to shape global price direction.
High-net-worth investor selling was also not a major driver, with flows appearing more linked to portfolio repositioning rather than outright liquidation.
Signs of stabilisation emerge
Early April data suggests some easing in pressure. ETF flows have turned positive across regions, while the U.S. dollar has struggled to extend gains beyond recent highs.
Options markets point to near-term caution, with elevated demand for hedging, although positioning further out on the curve suggests a more constructive outlook for gold.
There are also early signs of renewed buying interest from wealth managers and retail investors as prices stabilise at lower levels.
Risks remain in focus
In the short term, risks are still driven more by liquidity conditions than by traditional factors such as inflation or geopolitical tensions.
Sustained oil prices above $100 a barrel could trigger another wave of cross-asset deleveraging, pushing yields higher and forcing further liquidation across portfolios, including gold.
The World Gold Council noted that while underlying fundamentals remain intact, near-term price movements will largely depend on how investors react to liquidity pressures driven by ongoing geopolitical developments.
