Golden waterfall-style decline, where is the bottom?

AI · How Poland’s Gold Sale Signals the Spread of a Liquidity Crisis

In early March, news emerged that the Polish central bank planned to sell part of its gold reserves to raise $13 billion to fill gaps in national defense spending. This rare move sent a key signal: under the shadow of liquidity tightening, even gold—the ultimate safe-haven asset—may become one of the first to be sold off.

Since the news broke, gold has fallen for four consecutive weeks, but the real panic-driven decline occurred last week. Gold experienced its largest weekly drop since 1983, with spot prices briefly falling to the $4,500 level. This week, spot gold continued its plunge, dropping over 8% on Monday (March 23) to break below $4,200, erasing all gains for 2026. Market participants are asking: where is the safe-haven property of gold? Where is the bottom of this waterfall decline?

Image source: Visual China

Gold is fundamentally a hedge against dollar credit. In the long term, as U.S. fiscal deficits spiral out of control, debt ceiling crises become frequent, and the share of dollar reserves declines trend-wise, confidence in the dollar’s credit system continues to wane, prompting gold to trend upward. Over the past few years, central banks worldwide have been steadily buying gold, reflecting this long-term perspective. Traditionally, geopolitical conflicts are expected to boost safe-haven sentiment and push gold prices higher. But this time, the story did not follow that script.

In mid-March, ongoing Middle East geopolitical tensions should have been a golden opportunity for gold to shine. Yet, after the Federal Reserve’s decision on March 19, gold prices suffered a sharp decline, dropping over 4% in a single day. Clearly, soaring oil prices reignited inflation fears, prompting the Fed to signal a more “hawkish” stance at the March meeting—maintaining high interest rates longer and even considering another rate hike. Expectations for rate cuts this year quickly cooled. Meanwhile, the Bank of England kept rates unchanged with a 9-0 vote and stated it was “ready to act,” while the European Central Bank’s rate hike expectations also increased.

Major central banks worldwide are nearly synchronized in adopting a “hawkish” stance, indicating a systemic rise in global risk-free interest rates. This is a deadly blow to gold. As a zero-yield asset, the opportunity cost of holding gold is directly linked to global real interest rates. When rates are expected to rise, investors tend to sell gold and shift into interest-bearing dollar assets. The market’s main focus has shifted from geopolitical risk to interest rate risk, temporarily impairing gold’s safe-haven properties.

More concerning is that market pressure is shifting from “interest rate shocks” to “liquidity shocks.”

The longer high interest rates persist, the more vulnerable the real economy and financial institutions become. Elevated financing costs and tighter credit conditions mean that the primary concern for companies and institutions shifts from “preserving value” to “securing funding.” At this stage, gold plays a subtle role: it is the most liquid asset. When institutions need cash to service debt or cover expenses, the most liquid assets are sold first—even if it’s gold.

Poland’s recent actions exemplify this logic. Previously, Poland had been increasing its gold reserves, and by 2025, it was reported as the world’s largest official gold buyer. Until early March this year, local media reported that the Polish central bank governor Adam Glapinski proposed selling part of its gold reserves to raise up to 48 billion zloty (about $13 billion) to fill defense budget gaps, a plan supported by the Polish president. This is a highly symbolic signal: even sovereign institutions, faced with fiscal pressure, choose to sell gold rather than hold it in hopes of its safe-haven value.

Historically, similar liquidity shocks are not unfamiliar. In March 2020, the COVID-19 pandemic triggered global panic, leading to a liquidity crunch that caused gold to fall from $1,700 to around $1,450, a decline of over 15%. It wasn’t until March 23, when the Fed announced “unlimited quantitative easing,” committing to buy unlimited amounts of Treasuries and mortgage-backed securities, that the market structure fundamentally changed. With abundant liquidity injected into the market, the pressure to sell gold eased, and the opportunity cost of holding gold dropped to its lowest. Gold then surged to a record high of $2,075.

This reveals a key principle: the real buying opportunity for gold is not during a crisis but after central banks initiate quantitative easing.

Based on this, the current gold decline can be divided into three phases. The first phase is the interest rate shock, characterized by inflation data exceeding expectations, hawkish central bank signals, and rising U.S. Treasury yields, leading to tentative gold price declines. The second phase is the liquidity shock, as high rates expose vulnerabilities in the real economy and financial institutions, prompting more entities—companies, institutions, even countries—to sell gold for cash to meet debt and expenses. Since last week, gold has been breaking support levels, likely reflecting this pressure.

The most critical is the third phase: the restart of quantitative easing. Many market participants believe this could be the true buying point for gold. Currently, conditions for large-scale QE—whether systemic financial risks or a clear recession—are not yet ripe. Perhaps only when Fed Chair Jerome Powell takes office, the policy response function will undergo a fundamental shift.

It’s worth noting that Powell’s Senate confirmation process has officially begun but is mired in political deadlock. Key Republican senators have threatened to block the nomination over Justice Department investigations into Powell, adding uncertainty to the confirmation timeline. Powell’s current term ends in May; if a new chair is not confirmed by then, Powell will continue as acting chair.

Returning to Poland’s central bank move, this seemingly isolated case is actually a probe into the current global market’s structural pressures. When sovereign institutions start using gold reserves to meet fiscal needs, it signals that the pressure from rising rates and liquidity tightening has spread from the private sector to the public sector. Gold’s safe-haven role is temporarily yielding to its liquidity function.

Clearly, this waterfall decline in gold prices reflects the market’s dual pricing of interest rate and liquidity shocks. For long-term investors who still believe in the “de-dollarization” thesis, the real opportunity is not in “bottom-fishing” during the decline but in waiting for that decisive moment: when major central banks are forced to shift from “tightening” to “easing,” the long-term logic of gold may be reactivated. (Wealth Chinese Network)

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