Why is gold selling off amid market turmoil?
The safe-haven gold is struggling as global markets face their worst selloffs since the pandemic. Here's why.
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Mentioned
KEY POINTS
- Gold has eased over the past two sessions, down 3% to US$3,015/oz
- Trump's 'Liberation Day' tariffs sparked a sharp selloff across global equity markets, with the S&P 500 down 10.5% in the last two days
- The selloff forces institutional players and hedge funds to unwind positions to meet margin calls and funding requirements
- Despite initial weakness, gold historically rebounds fast post-crisis, as seen in 2008 and 2020 recoveries
Gold is widely regarded as a safe-haven asset, prized for its ability to hold value and its low correlation with stocks, bonds and real estate.
Yet, over the past two days, its price has slipped 3.0%, falling from $3,115 to $3,015 per ounce. The decline coincides with a sharp selloff across global equity markets, as the S&P 500 recorded its worst two-day drop since the pandemic, falling 10.5% between April 3 and 4.
Gold price chart (Source: TradingView)
With Trump's 'Liberation Day' tariffs sparking concerns of a global recession and trade war, why is gold, the supposed refuge, being pulled into the decline as well?
Liquidity, not fundamentals
The answer lies not in gold's fundamentals, but in its ability to be bought and sold easily. The Nasdaq has plunged 22.5% from its mid-February peak, entering bear-market territory, while the S&P 500 is down 17.4% over the same stretch.
Selloffs of this scale trigger a cascade of challenges for market participants — investors, institutional players, and hedge funds face margin calls, risk limit breaches, and value-at-risk (VAR) shocks.
Over the weekend, the Financial Times reported that Wall Street banks are demanding more collateral from hedge fund clients as portfolio values crater. “Several big banks have issued the largest margin calls to their clients since the beginning of the pandemic in early 2020,” the article noted. To meet these demands, investors turn to their most liquid holdings — assets that can be sold quickly to raise cash. Gold, prized for its liquidity, often tops that list.
Institutional investors, including hedge funds, commodity trading advisors (CTAs), and volatility-targeting strategies, often maintain diversified portfolios that pair gold with other asset classes.
When equities collapse, these entities don’t just trim stocks—they unwind positions across the board, including gold, to shore up capital. This phenomenon is termed a liquidity cascade, where even assets with low historical correlation — such as gold and equities — decline in tandem. The synchronised sell-off stems not from any fundamental weakness in gold, but from broad-based deleveraging across markets as participants seek to mitigate risk exposures.
That’s why gold tends to perform well during periods of economic and geopolitical uncertainty but struggles during periods of absolute crisis.
In the early days of the pandemic, gold dropped 12% between March 9 and March 19, 2020.
Gold price chart 2019-20 (Source: TradingView)
Similarly, during the 2008 Global Financial Crisis, gold slumped 29% from March 17 to November 18.
Once forced liquidation eases, gold tends to recover swiftly. After the pandemic plunge, gold rebounded within a month, surging more than 20% by August 2020. A similar pattern played out post-2008, as gold regained its footing faster than many other assets.
Gold vs. S&P 500 2019-2020 (Source: TradingView)
