The Soaring Price of Gold and Its Liquidity Crisis

Introduction

Historically, gold has served as a vital hedge to preserve value against currency devaluation.

• Since the beginning of 2025, gold prices have surged, reaching a record-breaking profit margin of 65% by October 2025.
• While the overarching upward trend has turned gold into an exciting investment opportunity, it remains accompanied by cautionary warnings regarding potential market corrections.

The Value of Gold

Historically, gold has been viewed as the ultimate hedge against inflation and geopolitical instability, due to its aesthetic appeal and scarcity.

• Unlike base metals like iron, gold is chemically inert and does not corrode over time.
• Beyond its use in jewelry due to its malleability, it is indispensable in the electronics industry for its high conductivity.

A look at historical trends shows that while gold experiences short-term volatility, its value generally trends upward over the long term.

• Despite the prominent bullish trend, some analysts caution that public overoptimism could lead to a significant correction.
• They point to the 2011-2015 bear market as a sobering example, during which gold lost nearly 45% of its value and took nearly nine years to fully recover its previous peak.

Unlike stocks, gold does not generate dividends or active profit; its worth is purely based on what the next person is willing to pay.

• This "unrealized gain" only becomes a tangible profit once the asset is sold.
• Consequently, the market is always balanced by traders selling to secure net profits.
• Furthermore, there is a psychological element for long-term holders: the fear of "selling too early" often keeps investors locked in, even as prices peak.

Market Trends and Geopolitics

Current market sentiment suggests that gold prices will continue to climb through 2026, driven by geopolitical conflicts and a weakening US economy burdened by a high debt-to-GDP ratio.

• In April 2025, the Donald Trump administration introduced global tariffs intended to boost the domestic economy.
• By January 2026, US foreign policy shifts regarding global oil reserves have further unsettled markets.
• Faced with a weakening US dollar, many central banks are aggressively accumulating gold reserves while divesting from US Treasury bonds for the past 2 years. As of late 2025, central banks held more gold than US Treasuries for the first time in 30 years.

These dotted events have created a false sense of security among the public, leading many to believe that prices would only move upward.

The Recent Collapse

On January 29, 2026, gold prices reached a spectacular high, breaking the RM 700 mark. This surge was fueled by a sentiment of "irrational exuberance", where the fear of missing out (FOMO) drove prices to unsustainable levels.

• Historically, when the general public perceives an asset - be it gold or real estate - as a "sure bet", a correction becomes imminent.
• For current holders and "chasers", a psychological trap emerges: the temptation to hold for easy gains often outweighs the discipline to secure profits before the bubble bursts.

The nomination of Kevin Warsh as Chair of the Federal Reserve by Donald Trump triggered an unprecedented crash, with gold dropping nearly RM 100 within 24 hours. This reaction stems from Warsh’s reputation as a "dollar hawk" (someone who prioritizes a strong currency and fights inflation).

• Panic-selling ensued as institutional investors raced to lock in profits before the USD strengthened further.
• With equity markets also declining, gold lost its status as a "safe haven" and behaved instead like a volatile commodity sold off to cover losses elsewhere.
• This made the price collapse fundamentally logical.

Gold has been volatile ever since, though it continues to trend higher.

The Reality Check

Unlike the past, when gold’s value was derived primarily from its physical scarcity, most modern gold transactions occur on digital banking platforms for the sake of convenience.

• Because most customers never take physical delivery, banks are essentially selling "paper gold" - a digital promise of value - while charging a spread for the service.
• When analyzed deeply, the paper gold currently being traded (and touted as a potential replacement for the US dollar) is fundamentally similar to Bitcoin: it is a digital narrative backed by trust.
• Banks can effectively "create" supply for millions of customers with a few keystrokes.
• This reality is often obscured by the fact that central banks worldwide, including the Federal Reserve, maintain physical gold and US dollar reserves to anchor and validate the perceived value of their national currencies.

The recent 18% decline within a 48-hour window is a devastating blow to the concept of a "safe haven". When an asset loses that much value so quickly, it stops behaving like insurance and starts behaving like a speculative stock.

• Unless non-U.S. economies can establish a value proposition independent of the U.S. dollar, gold remains vulnerable to speculative bubbles.
• Lacking an independent valuation, when funds liquidated their most liquid and profitable asset - gold - to cover losses in Microsoft on 30 January 2026, it created a 'clash' in gold prices.
• While a constant belief on gold thrives on uncertainty, the gold experienced a paradoxical "violent sell-off", dropping as much as 6% on 3 March 2026. The geopolitical safe-heaven premium is overwhelmed by a surging US dollar, forced liquidity due to the collapse in global equity markets, and the "inflation-interest rate" rate, despite the escalation in Iran-US conflict.
• On 5 March 2026, The National Bank of Poland (NBP) is reported considering selling a portion of its ~550-tonne gold reserves to generate roughly 48 billion zloty ($13 billion) to fund increased defense spending. With plans to repurchase these reserves later, the move highlights how central banks can influence gold prices to "buy low and sell high", often at the expense of retail investors.

In summary, many investors are treating gold as a liquidity asset, and willingly to sell their gold holdings to raise the cash necessary to cover margin calls on their leveraged stock portfolios or other purposes.

• While the gold price may continue to soar citing geopolitical tensions high and massive US sovereign debt, investors must remain vigilant - especially those entering the market at its peak.

Summary

The human world exists in a state of perpetual equilibrium: perfect optimism is inevitably corrected by an unexpected crash, while pessimism often creates the floor for new investment opportunities.

• The financial markets are defined by this constant cycle of expansion and contraction.
• Despite our sophisticated models, we remain unable to predict the future with certainty.

History shows that even the most dominant companies can become victims of their own success - much like the giants of the Dot-com bubble or Kodak, whose reliance on film prevented them from embracing the digital future they helped create.

• In the wake of gold correction, we are reminded once again that market stability is an illusion, and the only constant is the inevitable return to value and tangible reality.
• If the United States were defeated in a conflict with Iran due to exhausting its ammunition while gold remains a volatile liquid asset, the global financial system might eventually revert to a commodity-backed or resource-based economy, where trade is settled using essential raw materials (such as oil, wheat, minerals).