Iran war impacts the gold market, and the central bank's "permanent buyer" myth begins to shake!

A key support in the gold market is starting to wobble.

Since March, Turkey’s central bank has sold and swapped roughly 60 tons of gold, a scale larger than the net outflows from gold ETFs over the same period. The latter’s selling pressure had already been significantly amplified by “cash is king” sentiment triggered by turmoil in financial markets, rising bond yields, and a stronger U.S. dollar.

Gold prices have retreated by about 18% from the $5,000-per-ounce peak they broke earlier this year. With the conflict in the Middle East continuing to escalate and energy costs surging, more energy-importing countries are being forced to use gold reserves to obtain dollars, and the market consensus that central banks are “one-way buyers” in the gold market is facing unprecedented challenges.

Turkey is the first to break the convention of “central banks don’t sell gold”

The sheer scale of Turkey’s sell-off has caused the market to take notice. In two weeks in March, the country’s central bank sold and swapped roughly 60 tons of gold—equivalent to more than $8 billion—with the aim of countering currency pressure brought on by surging energy costs and a spike in market demand for the U.S. dollar.

This scale already exceeds the net outflow from gold ETFs over the same period—while the sell-off itself has also attracted considerable attention due to broader turmoil in financial markets, rising bond yields, and a dollar rebound.

Nicky Shiels, head of metals strategy at MKS PAMP SA, said: “The narrative of central banks as permanent one-way buyers is being challenged.”

Central bank gold-buying surge: a cornerstone of the gold bull market after 2022

Since the global financial crisis, central banks around the world have generally been net buyers of gold. By the end of 2022, the incident in which Russia’s foreign exchange reserves were frozen highlighted the need to diversify away from the dollar; central banks’ gold-buying pace then accelerated markedly. The annual amount of gold purchased by sovereign buyers is roughly equivalent to one-quarter of global annual mine supply.

Driven by this, gold prices have risen by more than 100% in cumulative terms since 2022, and broke through the $5,000-per-ounce level earlier this year.

However, a geoeconomic shock triggered by the Iran war is eroding this support. If more central banks follow Turkey, the overall pace of gold buying will slow significantly, and the long-held market assumption that central banks “hoard gold” will also be fundamentally called into question.

Energy importers and Gulf states: a reserve dilemma under dual pressure

The risk transmission path is clear. Some countries that have built up gold reserves over the long term are themselves energy importers. A sharp jump in oil and gas bills means fewer dollars remain available to replenish precious-metal reserves, and their gold purchasing power declines accordingly.

At the same time, Gulf states are also under pressure. The blockade of the Strait of Hormuz to most energy exports has severely compressed the oil-dollar inflows that these countries rely on to sustain their fiscal budgets. Although the Gulf states hold a sizable amount of diversified assets, the depletion of oil dollars still constrains their reserve management.

With no “last buyer” mechanism in the gold market, the risk of a downward spiral rises

Unlike the U.S. Treasury market, the gold market does not have a single overarching management institution above all parties. This means that gold assets held by different countries will not face the threat of being frozen, but it also means there is no institution analogous to the Federal Reserve that can step in as a “last buyer” to backstop prices in times of crisis.

Gold bulls are currently hoping that the People’s Bank of China can fill the demand gap. However, according to Bloomberg’s analysis, once emerging market economies collectively rush into the market to sell gold for dollars during a crisis, the self-reinforcing downward spiral in prices will be harder to contain.

Gold prices have already pulled back sharply from their peak, and with uncertainty about the trajectory of the war and the energy market, it remains difficult to judge when this pressure will reach a bottom.