Gold's violent reversal this month shows how a quick sentiment flip can erase value. Just last week, the yellow metal experienced one of the worst performances in decades, dropping 10.5%.

Prices peaked just shy of $5,600 an ounce in late January, capping a powerful rally driven by geopolitical tension, central bank demand, and retail momentum. But after a volatile February, the Middle East war upended the rally. The rout continued this Monday, touching $4,100 an ounce before rebounding.

"Gold is right now trading like a risk asset, as it has during most broad risk-off moments over the past two decades," Citigroup said in a note, adding that the pro-cyclical behavior appeared "particularly extreme" given the surge in retail participation and momentum buying over the past six months.

Flipping to Rate Hikes

Inflation fears have returned amid the escalating Middle East conflict. These expectations have quenched the expectations of a rate cut. According to the FedWatch, rate cuts are not even on the table. Instead, the market sees a 4.1% chance of a rate hike. Still, experts are not quick to write gold off.

"If you look at all three previous economic-shock cycles — in 2008, 2020, and 2022 — gold initially fell as markets reacted to news flow, with investors typically selling assets to hold the US dollar," David Wilson, director of commodities strategy at BNP Paribas, said, according to Bloomberg.

However, he clarified that a sustained rally followed each episode.

The Winner's Curse

Selling pressure may also be coming from official institutions. After weeks of rumors that Gulf region central banks might be selling gold, Bloomberg yesterday reported that Turkey's central bank had held discussions about a gold-for-foreign-currency swap. Spot gold immediately dropped 1.4%, showing the market’s sensitivity to rumored central bank actions.

Price Watch: SPDR Gold Shares (NYSE:GLD) is up 1.47% year-to-date.

Istanbul has expanded its gold reserves in recent years, and now it might use that, roughly $135 billion stockpile, to support the struggling lira.

Turkey's currency has lost more than 85% of its value against the dollar in this decade. The persistent negative trend has left policymakers reliant on intervention to stabilize the rate.

With energy prices surging and inflation still running above 30%, defending the lira has become increasingly costly. Thus, authorities might be forced to "sell the winner" to prop up the domestic market.

Still, not all signals point to a structural shift in demand. The World Gold Council says central banks are likely to remain net buyers, even after the recent rout.

"A phenomenon we've been seeing in the last few months is new central banks, or central banks that have been inactive or absent from the gold market for a long time, entering the gold market," Shaokai Fan, the group's global head of central banks, said, according to Reuters, adding the trend could persist into 2026.

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