It is particularly odd that economists who profess to be champions of a free-market economy, should go to such twists and turns to avoid facing the plain fact: that gold, that scarce and valuable market-produced metal, has always been, and will continue to be, by far the best money for human society— Murray Rothbard
In this issue
Why Isn’t Gold Acting Like a Safe Haven—Yet? The Gold–Oil Ratio and the Liquidity Stress
Behind Early-Crisis Gold Weakness (Part II)
I. What the Quiet Actually Means
II. Safe Havens and the Hierarchy of Money
III. The Gold–Oil Ratio and Crisis Transmission
IV. Mean Reversion or Regime Shift? Interpreting the
Gold–Oil Ratio
V. Liquidity Stress: When Gold Falls First
VI. Real-Time Example: Central Banks Mobilize Gold, Turkey’s
Gold Sales
VII. Real-Time Example: Liquidity Stress in the UAE
VIII. Gold Across Monetary Regimes
IX. Conclusion: The Signal in the Silence
Why Isn’t Gold Acting Like a Safe Haven—Yet? The Gold–Oil Ratio and the Liquidity Stress
Behind Early-Crisis Gold Weakness (Part II)
Energy shocks, dollar liquidity stress, and why gold
often lags before it leads during financial crises
Part II
I. What the Quiet Actually Means
Part I examined why gold has remained surprisingly subdued despite escalating geopolitical tensions and rising oil prices. The explanation lies not in the failure of gold’s safe-haven role, but in the mechanics of liquidity stress and the structure of the global bullion system.
Part II explores what that quiet may be signaling. By examining the relationship between gold and oil, the liquidity dynamics of financial crises, and gold’s behavior across monetary regimes, a clearer picture begins to emerge.
Gold’s silence may not reflect stability.
It may instead reflect the early stage of a broader liquidity adjustment inside the global
dollar system.
While modern financial systems are built on credit rather than metal, periods of stress often reveal that the hierarchy of money still persists beneath the surface.
II. Safe Havens and the Hierarchy of Money
Safe-haven assets are often misunderstood. In practice, they represent savings held in forms with high moneyness—assets expected to preserve value (store of value) while remaining readily marketable during periods of stress.
Their appeal rests on two characteristics: the ability to preserve purchasing power and the ability to be converted into cash quickly with minimal price disruption or marketability.
Crucially, these properties are context-dependent. Assets perceived as safe are not inherently risk-free; their status reflects market confidence in their liquidity and convertibility. U.S. Treasuries, for example, are technically government liabilities, yet they function as safe assets because of their deep, liquid markets and the central role of the dollar in global finance.
Gold occupies a distinct position in this hierarchy. Its moneyness is reinforced not only by the absence of counterparty risk but also by physical characteristics—durability, divisibility, recognizability, and malleability—that historically supported its acceptability across time and geography.
These features contributed to gold’s persistent marketability, particularly in environments where trust in financial intermediaries weakens.
However, as Austrian economist Gary North emphasized, these properties do not constitute intrinsic value. Value is not inherent in the metal itself but is imputed by market participants. Gold’s status as a safe-haven asset therefore arises from sustained confidence in its liquidity and acceptability, especially under conditions of stress.
This hierarchy becomes clearer when markets transition from stability to crisis.
Figure 1
The divergence among major fiat currencies highlights how gold’s moneyness becomes more pronounced as confidence in fiat purchasing power declines. (chart from Jesse Colombo’s The Bubble Bubble Report) [Figure 1]
As described by Hyman Minsky, prolonged financial stability encourages leverage and risk-taking. When stress emerges, this dynamic reverses abruptly. Market participants experience a liquidity squeeze, reprioritizing assets according to their moneyness—favoring those that can be converted into cash quickly and reliably without significant loss of value.
III. The Gold–Oil Ratio and Crisis Transmission
One way to understand gold’s muted response to current geopolitical tensions is through its relationship with oil.
Oil represents an immediate claim on global liquidity. It is consumed, dollar-priced "Petrodollar", and highly sensitive to geopolitical disruption. Gold, by contrast, represents stored value—held primarily as protection against monetary instability.
(Incidentally, oil is often called “black gold,” reflecting its quasi-monetary properties: global acceptability, scarcity, and embedded value as the economy’s primary energy input.)
Figure 2
In real terms, Brent oil’s price trend appears to have formed a secular bottom in the late 1990s around the Asian Financial Crisis. (Figure 2, upper chart)
Since then, the broader trajectory has been upward, interrupted by the 2000s commodity spike and the pandemic collapse. This pattern points to deeper structural forces: monetary expansion, chronic underinvestment in energy, and rising geopolitical risk.
With Middle East tensions intensifying and war-economy dynamics increasingly shaping policy, the current oil shock may prove more persistent than markets expect.
When geopolitical shocks drive oil prices sharply higher,
the global financial system experiences a liquidity drain as energy-importing
economies scramble for additional dollars to fund higher fuel costs—tightening
financial conditions across currencies and credit markets.
With dollar credit estimated at roughly $14 trillion—over half in debt securities (Bank of International Settlement)—this dynamic amplifies dollar demand during periods of stress. [Figure 2, lower image]
This mechanism echoes economist Irving Fisher’s debt-deflation dynamics: rising costs and tightening collateral conditions force economic actors into a dollar funding pressure.
In such episodes, gold does not always rise immediately.
Instead, the gold–oil ratio compresses as oil outpaces gold. The system prioritizes settlement over preservation—dollars are needed to pay for energy before reserves can be accumulated as protection.
Historically, this reflects the early phase of crisis transmission. Energy shocks propagate rapidly through trade balances, currencies, and funding markets, triggering collateral demand that can temporarily suppress traditional hedges.
Only later—once liquidity pressures ease or policy responses take hold—does gold tend to reassert itself.
IV. Mean Reversion or Regime Shift? Interpreting the Gold–Oil Ratio
The gold–oil ratio captures the relative performance of the two commodities; recently, gold has significantly outperformed oil. Heuristically, it can be read as follows:
- High ratio: monetary stress, weak growth, disinflationary pressures
- Falling ratio (oil catching up): cyclical inflation, supply shocks, rearmament, and stronger industrial demand
If the global economy is transitioning toward a war footing—characterized by higher defense spending, rising commodity intensity, and tightening energy geopolitics—then near-term oil outperformance relative to gold is plausible.
Even in a less oil-dependent world, geopolitical tensions can amplify supply–demand imbalances.
That said, these forces can overlap. Inflationary pressures, financial stress, and supply shocks may coexist rather than unfold sequentially.
Mean reversion suggests scope for oil to outperform gold, with historical anchors around ~18–22 (mean) and ~15–18 (median). However, these benchmarks may no longer be stable.
First, Goodhart’s Law applies: once the ratio becomes a widely targeted signal, its reliability deteriorates.
Second, base effects distort comparisons, especially after extreme moves. When ratios are measured off extreme starting points—such as the pandemic collapse in oil or gold’s surge during periods of monetary stress—subsequent moves can appear disproportionately large or directional. In reality, these shifts may reflect mechanical normalization from distorted bases, rather than a clean cyclical signal.
Figure 3
Third, the apparent gold-oil ratio uptrend since 2008 indicates shifting structural drivers—implying that historical mean/median benchmarks may themselves be drifting higher. (Figure 3)
In short, while mean reversion remains a useful guide, the regime may be evolving—making static historical anchors increasingly unreliable.
It may be that the recent compression in the gold–oil ratio reflects gold’s prior fat-tailed outperformance, with the current move representing a normalization back toward its two-decade trend channel rather than a structural reversal.
V. Liquidity Stress: When Gold Falls First
One of the most counterintuitive features of financial crises is that gold can weaken precisely when investors expect it to strengthen.
This occurs because gold is not only a store of value—it is also one of the most liquid assets in global markets.
When financial stress intensifies, institutions face margin calls, collateral demands, and funding obligations. To meet these pressures, they liquidate assets that can be sold quickly.
Gold often becomes one of those assets.
This reflects the liquidity phase described by Hyman Minsky, in which the immediate need for funding temporarily overrides longer-term investment considerations.
During this stage of a crisis, the system prioritizes cash over protection.
Gold may weaken not because its safe-haven role has disappeared, but because it remains one of the few assets capable of generating immediate liquidity.
VI. Real-Time Example: Central Banks Mobilize Gold, Turkey’s
Gold Sales
Figure 4
Recent news reports indicates that Turkey deployed gold-linked lira and foreign-exchange swaps, alongside outright sales, to support the lira during a period of market stress, as the USD/TRY exchange rate surged to successive record highs. Its gold reserves fell by roughly 50 tonnes (to 772 tonnes), the largest decline since 2018. [Figure 4]
Such operations illustrate another dimension of gold’s role in modern reserve management. By mobilizing gold through swaps, central banks can generate immediate foreign-currency liquidity, effectively using gold as a liquidity bridge—complementing direct FX intervention rather than fully substituting for it.
However, these tools primarily address short-term liquidity pressures rather than underlying macroeconomic imbalances.
When markets perceive that a central bank is actively deploying finite reserve assets, these actions can signal constraint—potentially raising risk premia and intensifying pressure on the currency.
As external buffers are drawn down, the policy path often becomes increasingly dependent on domestic liquidity provision, with central banks resorting to expansion of the monetary base to sustain market functioning.
This dynamic
highlights the reflexive nature of intervention: measures intended to stabilize
markets can amplify fragilities over time through resource misallocation.
Importantly, such actions do not diminish gold’s
monetary role. On the contrary, they demonstrate that gold continues to function as high-quality collateral within
the global financial system during periods of stress.
VII. Real-Time Example: Liquidity Stress in the UAE
Recent developments in the Gulf financial system offer a
contemporary illustration of these dynamics.
Figure 5
Following a sharp collapse in banking liquidity—reportedly approaching 45 percent in parts of the regional funding market—the Central Bank of the United Arab Emirates moved to inject massive amounts of liquidity into domestic banks. [Figure 5, upper diagram]
The intervention aimed to stabilize funding conditions and prevent disruptions in the region’s financial system.
While such measures can temporarily ease liquidity pressures, they also reveal the underlying structure of modern crises. When funding conditions tighten, policymakers must often intervene rapidly to maintain the functioning of credit markets. In the short term, these interventions can strengthen demand for dollar liquidity, particularly in economies closely tied to global energy markets.
The result is a paradox.
Even as geopolitical tensions rise and energy prices surge—conditions that would normally support gold—financial systems may initially prioritize liquidity stabilization over reserve accumulation.
Gold’s subdued behavior during such episodes may therefore reflect not complacency, but temporary pressure within the global funding system.
This dynamic is further illustrated by recent developments in the U.S. dollar. Despite shocks including the U.S.–Israel–Iran conflict, the DXY index has shown muted gains and even diverges from 2-year rate differentials. [Figure 5, lower pane]
This suggests that dollar strength in this period is less about a classic safe-haven bid and more about liquidity demand driven by de-risking and deleveraging.
The lack of coordinated upside in gold, bonds, and
bitcoin points to collateral stress rather than a simple flight to
safety. Meanwhile, interest rates
themselves may reflect not only policy and war risk, but also fiscal pressures
and issuance dynamics, blurring the signals that rate differentials typically
provide.
In classic safe-haven episodes, defensive assets tend to rise together. When that coordination breaks down, it often signals that markets are prioritizing liquidity and collateral access rather than portfolio hedging.
VIII. Gold Across Monetary Regimes
Figure 6
Gold’s long-term behavior is non-linear. Its bull markets tend to move in waves associated with epochal shifts in global monetary regimes. [Figure 6]
The first bull cycle followed the collapse of the Bretton Woods system after the Nixon Shock and lasted until the early 1980s. This was followed by a bear market and a two-decade lull, reflecting the “salad days” of the U.S. dollar standard—characterized by the rise of globalization, the Fed’s drift toward easy-money policies, and the deepening of the dollar’s exorbitant privilege.
A second wave emerged in the early 2000s and accelerated after the Global Financial Crisis, when central banks dramatically expanded their balance sheets in response to economic shocks.
The current period represents a third phase—marked by a drift toward a war economy: protectionism, sanctions, and kinetic conflict—while also shaped by overlapping forces including evolving monetary policies, the weaponization of the dollar, oil and commodity dynamics, AI-driven structural uncertainty, and central bank accumulation of gold.
These forces are gradually reshaping how gold is accumulated, traded, and—for central banks—deployed within national reserve strategies.
IX. Conclusion: The Signal in the Silence
Gold’s current calm should not be mistaken for irrelevance.
Financial crises rarely begin with a clean flight to safety. Instead, they begin with liquidity stress. Funding markets tighten, institutions scramble for cash, and the most liquid assets are often sold first to meet obligations.
In these early stages, the global financial system prioritizes settlement over preservation. Energy shocks drain dollars from the system, trade balances shift abruptly, and capital flows reprice risk across currencies and credit markets.
This sequence helps explain why gold can appear subdued even as geopolitical tensions escalate. Oil shocks transmit stress through the real economy first, tightening liquidity before investors turn toward long-term stores of value.
Only later—once liquidity pressures ease or policy responses expand—does gold typically reassert its defensive role.
The current compression in the gold–oil ratio may therefore reflect not the failure of gold as a safe haven, but the timing of crisis transmission within a dollar-centric financial system.
If the emerging environment is indeed shifting toward a more fragmented geopolitical order—characterized by energy insecurity, fiscal expansion, de-globalization, kinetic conflicts, and a gradual erosion of monetary trust—then gold’s quiet phase may represent the prelude rather than the conclusion of its cycle.
The signal is not absent.
It may simply be arriving later in the crisis sequence.
