The gold price fell 12% in March, making it the weakest month for gold since June 2013, and has since slipped to its lowest level since early March.
What explains the drop? A World Gold Council (WGC) analysis offers a plausible set of explanations. The bottom line, according to the report, is that “deleveraging and liquidity dynamics, not fundamentals, led the March sell‑off in gold.”
In March, rising volatility forced many investors to reduce risk and raise cash. Liquidity pressures forced the sale of even safe‑haven assets, such as gold, in order to meet margin requirements.
On the face of it, selling gold during a period of geoeconomic volatility may seem surprising. As the WGC puts it, the sell‑off “occurred against a backdrop normally supportive for gold: elevated geopolitical tensions and renewed inflation concerns. The episode is a reminder that gold is not a contractual hedge. Prices rise only when incremental buyers exceed sellers.”
As we have recently discussed, one could argue that gold was in fact behaving exactly as intended, serving both as a portfolio diversifier and as a source of liquidity during a period of market stress.
Beyond the buffer zone
While the WGC note gives reason for optimism, it also contains an eye‑catching detail. Although there are signs of macroeconomic stabilisation, the risk posed by oil markets may be more significant than casual observers may realise.
To quote the WGC (emphasis added): “Should the conflict keep oil prices well in excess of US$100/bbl for an extended period – given that the somewhat muted response was reportedly due to buffers that no longer exist – this could risk further cross‑asset deleveraging, yield blow‑outs, or gold mobilisation by the official sector.”
The report in question, from Rystad Energy, suggests that the “relatively muted” reaction of markets to supply disruption was not an underreaction so much as evidence of shock‑absorbing buffers. However, prolonged disruption could lead to a stronger market response: “The global oil system can no longer absorb shocks the way it could three weeks ago. Any secondary disruption that would have generated a linear, manageable price response in a buffered system … would now hit a market with no absorptive capacity left.”
Reflexivity in action
Beyond the immediate implications for energy markets – and for gold and other commodities -this episode serves as a salutary reminder that prolonged volatility has a dynamic effect on market behaviour. The longer volatility persists, the more market participants adapt their risk management practices, balance‑sheet structures and liquidity preferences. These adaptations, in turn, change how markets respond to subsequent episodes of stress. While this is not a simple feedback loop, it is a dynamic system in which responses to volatility reshape the conditions under which future volatility is absorbed.
In short, markets are not passive recipients of shocks. The ways in which they respond to events actively reshape market outcomes.
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