Author: Lv Liqing_JimmyLv; Source: X, @Jimmy_JingLv
Gold, stocks, and bonds all falling at the same time points to one word: stagflation. The last time this happened was in the 1970s, when Volcker raised interest rates to 20% to contain it.
Day 24 of the Iran war. Gold dropped from $5,001 to $4,233, evaporating 15.4% over five trading days—the largest weekly decline since 1983. During the same week, Brent crude oil rose 8.5%, and the S&P 500 fell 3.1% (four weeks of consecutive declines). KOSPI plunged 6% intraday, triggering another circuit breaker.
Many see gold falling and their first reaction is, “The war must be ending, risk aversion is fading, stocks should rise now.”
But look at oil prices—Brent at $112, WTI back above $100—does that look like an ending?
Gold falling, stocks falling, oil rising—all at once. This in itself is very strange:
All financial assets are declining, except for oil, which is rising due to missile disruptions breaking supply chains.
This state has a name. It’s not “risk aversion fading” or “technical correction”—it’s stagflation.
Stagflation: The Fed’s toolbox is failing
Stagflation = economic stagnation + inflation occurring simultaneously.
In a normal economic cycle, recession and inflation are like a seesaw—when the economy slows, inflation tends to decrease; the Fed can cut rates to stimulate. When inflation is high, it indicates overheating, and the Fed can raise rates to cool down. There’s always a lever to pull.
Stagflation breaks this seesaw. The economy is slowing (S&P 500 falling for four weeks, Korea hitting circuit breakers), while inflation is soaring (Brent at $112 pushing up all costs). The Fed wants to cut rates? Oil prices fuel inflation. Want to raise rates? Employment is already collapsing (non-farm payrolls -92,000). Neither side can be controlled.
Powell’s statement on March 18 was very straightforward: “The path to 2% inflation is more obstructed.” The dot plot was revised from two rate cuts this year to at most one. The rate remains at 3.50%-3.75%, with no action.
Doing nothing is a sign of stagflation. When central banks have tools, they usually use them. Doing nothing means each tool would make the other side worse.
Transmission chain: How oil prices trigger everything
The stagflation of the 1970s was also triggered by oil prices—OPEC’s 1973 oil embargo quadrupled oil prices. The U.S. then experienced a decade of high inflation, high unemployment, and low growth. It wasn’t until 1979, when Volcker became Fed chair and violently raised rates to 20%, that inflation was finally tamed through a deliberately induced deep recession. The cost was unemployment soaring to 10.8%.
This time, the trigger has changed—from the Arab embargo to the Iran war, from OPEC’s voluntary production cuts to the missile blockade of the Strait of Hormuz. But the transmission chain remains the same: oil supply disruption → energy prices surge → costs of all goods and services increase → inflation becomes sticky → central banks are caught in a dilemma.
The petrodollar cycle is broken: Why can’t US stocks withstand this?
The dollar is strengthening, which should attract foreign investment into US stocks. But US stocks have been falling for four weeks. Why?
There’s an invisible capital pipeline in the global economy: emerging markets export goods earning dollars, use those dollars to buy Middle Eastern oil, and the oil-producing countries then reinvest their huge dollar reserves into the US—buying bonds, stocks, real estate. This petrodollar cycle has been a key support for long-term US stock market growth.
Other markets are only impacted by oil prices; US stocks, besides oil shocks, have also lost a long-term capital source. The current challenge for US stocks might be greater than for other markets.
Why is gold falling instead: gunpowder and the fuse
Many analysts attribute gold’s sharp decline to margin calls. That’s partly correct—the margin call is the fuse, but the gunpowder has been piling up for a long time.
Gunpowder: Gold is a zero-yield asset, and the failed rate cut expectations are deadly for it. Gold pays no interest or dividends. The main reason to hold it is “interest rates will fall in the future, locking in gold now is more profitable than holding bonds.” But when the Fed clearly states it will cut at most once this year, and the 10-year Treasury yield is at 4.25%, you’re giving up 4.25% annually just to hold a non-yielding metal—this calculation becomes unsustainable.
Fuse: The rise and fall are from the same source. Gold rose from $1,800 to $4,000 mainly because central banks bought over 1,000 tons annually for three years. But in the final leg from $4,000 to over $5,000, ETF inflows accelerated—Q3 2025 saw record inflows of $26 billion (World Gold Council data). Meanwhile, central bank purchases above $4,000 decreased by 21% (more expensive, less can be bought with the same budget).
During the crash, this structure reversed: central banks wouldn’t panic-sell (long-term strategic holdings), but ETF investors could redeem at will. The 15% five-day drop from $5,001 to $4,233 was driven by ETF outflows and margin calls. The upward and downward forces come from the same group of people.
But an important side note: although central banks bought fewer tons, they still plan to increase holdings in 2026 (per World Gold Council survey). The long-term logic remains unchanged—dollar dominance waning, US debt expanding. In 2008, gold first fell 30%, then surged nearly 170% ($700 to $1,920). In 2020, it dropped 12%, then rose 40%. Every liquidity crisis follows this script: short-term sell-offs, then a return to safe haven.
“Gold fell, so it’s time to buy stocks”—where’s the flaw?
Gold’s decline is due to zero-yield assets losing appeal in a high-interest environment + retail panic + forced margin liquidation. It has nothing to do with “risk aversion fading.”
The premise “gold falls → stocks rise” only holds if oil prices also fall—meaning the war is easing, inflation pressures are easing, and the Fed can consider cutting rates again. Capital would then flow from safe assets back into equities.
But oil is still at $112. This premise doesn’t hold.
How to determine what kind of decline gold is experiencing?
The sequence is: oil price falls (war easing), then gold stabilizes (selling wave ends), then stocks rise. If stocks rise first but oil doesn’t fall—that’s a false rebound, don’t chase.
1970s vs. 2026: What’s different this time?
The 1970s stagflation was ultimately resolved by Volcker’s aggressive rate hikes—at the cost of a manufactured recession, with unemployment hitting 10.8%.
Does the current Fed have that resolve? Rates are already at 3.50-3.75%. To do a Volcker-style hike to 6-7%, mortgage, corporate, and consumer debt would collapse. More realistically, the Fed will continue to “do nothing”—and stagflation will persist until oil prices fall on their own.
When will oil prices drop? Either the war ends, the Strait reopens, or demand collapses under high oil prices (above $150, triggering a global demand crash). None of these are short-term events.
A 15% drop in gold? It will rebound afterward—an old script. The real concern is how long stagflation might last. War is just a trigger; ceasefire ends it. But once stagflation sets in, its inertia is much greater—like the 1973 oil embargo, which lasted ten years, even though the initial crisis only lasted months.
What can survive in a stagflation environment?
The traditional “60/40 stocks and bonds” portfolio gets hit from both ends: stocks fall (due to economic slowdown), bonds fall (due to inflation eroding yields). Gold may be temporarily used as a liquidity source, but long-term it’s one of the best assets during stagflation (from $65 in 1973 to $850 in 1980, over 10x).
Currently, holdings like $NVDA, $META, $GOOG—growth stocks—are in the “likely to die” category. Energy stocks and commodities are in the “can survive” category—but I don’t hold any. This is the next key area for portfolio adjustment.
When can you buy? Three signals
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$BZ (Brent crude) drops below $100 + gold stabilizes — war easing + selling wave ends
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$VIX drops from 27 to below 23 — panic recedes
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Fed signals rate cuts / liquidity injections — central bank starts to backstop
At least two of these should occur. Currently, none have.
This Friday’s PCE data is a big test. PCE (Personal Consumption Expenditures Price Index) is the Fed’s preferred inflation indicator—more important than CPI because it covers a broader range (including healthcare and items CPI misses), and adjusts for substitution behavior (like switching from beef to chicken when beef gets expensive). When the Fed talks about a 2% inflation target, it’s referring to PCE. With $112 oil, the inflation outlook is likely hot, further diminishing hopes for rate cuts—stoking the stagflation narrative.
The only bullish catalyst is a ceasefire. But Trump’s shift from “considering withdrawal” to “if the Strait isn’t open in 48 hours, power plants will be attacked”—in such an environment, any ceasefire signals are highly unreliable.
War will end—maybe in a month, maybe in three. But the inertia of stagflation is much greater—like the 1973 oil embargo, which lasted ten years, even though the initial crisis only lasted months.
In such times, two types of people are especially visible:
One is “speculators”: betting on oil prices, on ceasefire timing, on war ending. Correct guesses can make quick profits; wrong guesses can wipe out. In a stagflation environment, this risk is magnified—since even gold can fall 15% in a week, there’s no certainty to bet on.
The other is “investors”: seeking assets with sufficient safety margins, not afraid of short-term losses because their entry points already include enough buffer. The core skill is not “guessing the right direction” but “not dying if wrong.”
Warren Buffett said, “The first rule of investing is: don’t lose money. The second rule is: don’t forget the first.” In stagflation, this advice becomes even more specific—your holdings must withstand extreme scenarios like oil at $150, the Fed staying put, and war dragging on for two more months. Positions that can’t handle this should be reconsidered, regardless of current gains or losses.
The only question now is: “If stagflation lasts one or two years, can my portfolio survive?”
