Gold’s Sell-Off Is About Liquidity, Not Fundamentals

• Despite popular belief, the gold sell-off is likely driven by the precious metal being one of the last few sources of liquidity available for investors, not weakening fundamentals.
• Regardless, the long-term trends could still favor the growth of gold. The price of the metal may be down for now, but it may be too early for investors to give up on gold.
• To stay engaged with gold, even amid a downturn, looking to a gold miner ETF like the Sprott Gold Miners ETF (SGDM) could help.

Gold’s sell-off in the wake of the escalating conflict in Iran is well-documented at this point. 

Yes, it’s undeniable that the price of the precious metal has fallen noticeably over the last month or so. Despite the risk of inflation mounting, the price of gold fell, seemingly challenging the narrative of gold’s strong fundamentals as a store of value. However, the factors behind gold’s price drop may not actually be about weakening fundamentals. 

In a recent report from Sprott Asset Management, Paul Wong, managing partner and market strategist at Sprott, examined the state of play behind gold’s recent performance. According to Wong, the gold sell-off was not as much due to the metal losing its potency as a portfolio asset, and instead was sold off as a liquidity play. 

History tends to repeat itself. As Wong noted, gold saw significant sell-off periods in both 2008 and 2020, not due to weakening value as a hedge, but instead because it “was one of the last remaining sources of liquidity.” According to Wong, following these sell-offs and subsequent policy enactments, the price of gold would has historically hit all-time highs within months. 

For today’s markets, Wong evaluated that the long-term fundamentals for gold remain strong, with crucial features that match 2008 and 2020’s conditions. These factors include tight financial conditions, pressure on the global monetary system, and growing cross-asset volatility. 

Looking at the big picture, with persistent inflation risks, whipsawing energy prices, widening deficits, and more, Wong argued that the case for quantitative easing is on the rise. Traditionally, quantitative easing* can play well into gold, due to currency devaluation. 

“Moreover, the structural trends that underpin gold’s secular bull market remain intact: the erosion of the dollar-centric reserve system, the fragility of the petrodollar framework, and the remonetization of gold as a neutral reserve asset,” Wong added. “None of these dynamics has reversed; if anything, they have accelerated.”

For these reasons, it could pay off to stay engaged with gold through a fund like the Sprott Gold Miners ETF (SGDM). SGDM is a fund from Sprott that provides distinct access to large- and midcap gold miners listed in the U.S. and Canada. 

Taking on gold miner exposure could make sense right now. For those looking to buy-and-hold gold exposure through this downturn, a strategy that may be less exposed to that kind of price movement could provide the most compelling path forward. 

For more news, information, and analysis, visit the Gold/Silver/Critical Minerals Content Hub.

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