Huatai Securities: The long-term asset reallocation logic for gold remains solid; focus on recovery opportunities after recent gold price declines stabilize.

Huatai Securities research notes that the recent drop in gold prices is mainly driven by a liquidity squeeze. When facing risk, investors tend to hold cash, and assets such as gold are likely to be sold off. On one hand, geopolitical tensions in the Middle East are intensifying; Gulf countries are facing cash-flow pressure, and gold may face near-term pressure to shift from “paper gains to real fundamentals.” On the other hand, market concerns about stagflation combined with weaker expectations of rate cuts have increased volatility in risk assets, triggering a liquidity squeeze. In the current macro environment, a situation similar to the 1973–1975 oil crisis can be referenced. At that time, gold prices went through a two-drop, two-rise pattern; during the period, liquidity squeezes formed by risk avoidance and economic recession were the main cause of the fall in gold prices; stagflation and loose liquidity, meanwhile, catalyzed two rounds of uptrends. We believe the logic for gold’s medium- to long-term asset reallocation remains solid; getting the timing of investments right is crucial in risk events.

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Huatai | Nonferrous Metals: Gold - Grasping the investment tempo during risk events

Key takeaways

We believe the recent drop in gold prices is mainly driven by a liquidity squeeze; when facing risk, investors tend to hold cash, and assets such as gold will all face sell-offs. On one hand, geopolitical tensions in the Middle East are intensifying; Gulf countries are facing cash-flow pressure, and gold may face near-term pressure to shift from “paper gains to real fundamentals.” On the other hand, market concerns about stagflation combined with weaker expectations of rate cuts have increased volatility in risk assets, triggering a liquidity squeeze. In the current macro environment, a situation similar to the 1973–1975 oil crisis can be referenced; at that time, gold prices went through a two-drop, two-rise pattern, and the liquidity squeezes driven by risk avoidance and economic recession were the main cause of the decline in gold prices; stagflation and loose liquidity catalyzed two rounds of rising markets. We believe the medium- to long-term asset reallocation logic for gold remains solid; getting the timing of investments right is crucial during risk events.

Falling risk appetite and liquidity squeezes push down gold prices

The recent decline in gold prices may be due to liquidity squeezes. Based on CFTC positioning data, asset management institutions’ net long positions have decreased significantly, falling from 134k contracts on January 13 to 91k contracts on March 24, a drop of 32.0%, to the lowest level in nearly a year. This reflects that in the face of risk events, institutions tend to realize gains in gold and other high-liquidity assets to ease potential liquidity pressure. By comparison, in early November 2022, asset management institutions also shifted from long to short in their gold positions due to the Russia-Ukraine conflict combined with Fed rate hikes. We believe liquidity squeezes temporarily detach gold from its traditional inflation-hedging attributes, thereby putting downward pressure on gold prices. Going forward, as net long positions among asset management institutions have already declined markedly, crowding of longs has been eased significantly, and the marginal selling pressure may be close to the end of its release phase.

Macro: In the near term, gold faces pressure to shift from “paper gains to real fundamentals”

According to Huatai Macro’s report “When Oil Turns into ‘Gold’” (26-03-22), against the backdrop of almost blocked the Strait of Hormuz and global physical energy shortages, gold in the near term has become a “golden canary in the coal mine” for Gulf countries and cash-flow pressured emerging markets. Amid the shock of shortages of goods, the market shows strong pressure to shift from “paper gains to real fundamentals.” Because global central banks and the private sector’s holdings have been at historical highs previously (the proportion of gold in reserves rose from 12.8% in 2020 to 24.5% by the end of 2025), and the gold-to-oil ratio has reached a record high value after the war, gold is not “a necessity” in the near term. For Gulf countries whose cash flows are physically blocked due to conflicts, reducing holdings of highly profitable gold in exchange for necessities is a rational choice.

During the 1973–1974 oil crisis, gold prices went through two rising/declining cycles

During the first round of the 1973–1974 oil crisis, the gold price experienced four phases: falling—rising—falling again—rising again, with the overall process seeing a substantial increase in gold prices. After the outbreak of the Fourth Middle East War on October 6, 1973, gold prices rose initially; then market panic led to a liquidity squeeze, causing gold prices to fall (gold fell 8.63% from $98.5/oz to $90.0/oz during 11.9–11.23). From December 1973 to March 1974, the per-barrel crude oil price rose from $4.1 to $13. Market panic sentiment gradually eased as fighting paused, and the market began to switch toward stagflation hedging; gold prices rose 73.67% to a high of $175/oz. During the U.S. economic recession in 1974Q1–Q2, from March to July, the gold price fell again by 21.6% to $136.5/oz. As the Fed shifted toward rate cuts, gold prices rose again in 1974H2, up 29.9% to $185.8/oz.

Watch for repair opportunities after gold prices stabilize following the recent decline

Although gold faces pressure in the short term, we still like gold’s medium- to long-term safe-haven logic. In the short term, gold’s price action will depend heavily on how long the Strait of Hormuz blockade lasts and the progress of global liquidity repair. Looking at the medium to long term, de-dollarization and fiscal unsustainability will continue to support gold’s allocation value, and the pricing logic for gold will shift toward hedging credit risk and asset reallocation. Based on the gold average price of $4,562 per ounce calculated on March 20, the share of globally investable gold is only 3.35%. If, by 2026–2028, the share of globally investable gold exceeds the peak in 2011 (3.6%) and reaches 4.3%–4.8%, the gold price could rise to $5,400–6,800 per ounce. However, before the reopening of the strait and the restoration of the petrodollar cycle, investors still need to watch for the risk of a liquidity squeeze similar to the mid-1974 scenario.

Risk warning: international geopolitical situation, downstream demand falling short of expectations, and liquidity squeezes caused by institutions closing positions.

（Source: First Finance）