Why people sell gold and switch to bonds during a crisis

It's very strange to see a situation where, during the height of a crisis, gold begins to rapidly fall in price, and investors flock to bonds or simply keep their money in cash.

At first glance, this seems counterintuitive. After all, gold is traditionally considered a safe haven asset, and over the long term, it can actually outperform many conservative instruments.

For example, according to TradingView, XAUUSD has grown by approximately +232% over the past 10 years.

By comparison, US corporate bonds have performed much more modestly over the same period: the iShares LQD fund, which tracks investment-grade corporate bonds, has returned about 30% in 10-year total returns, while the riskier HYG high-yield bond fund has returned about 66%.

After such a comparison, the question naturally arises: why sell gold, which has grown several times over the past 10 years, and invest in bonds, which have yielded much less?

The answer is that large fund managers often view the market very differently than individual investors. Individual investors can afford to think with a 5-10-year horizon.

A fund manager often works from report to report: month, quarter, year. They are evaluated not only on long-term returns, but also on current drawdowns, volatility, risks, and client reactions.

If a fund manages, say, $100 billion, and $20 billion of that is invested in gold, then a 10% decline in gold represents a paper loss of approximately $2 billion. For a retail investor, this is a temporary price decline.

For the fund, the problem lies in reporting, explanations to clients, questions from the risk committee, and possible capital outflow.

That's why many funds try to quickly get rid of an asset that's started to plummet. They move their money into safer instruments: Treasury bonds, corporate bonds, cash funds, or simply cash. This doesn't always mean the manager believes bonds are better than gold over a 10-year period. More often, they simply want to reduce risk immediately and demonstrate to clients that the fund is in control.

There's another important factor: liquidity. Gold is very easy to sell, especially through futures and ETFs. When markets fall and cash is urgently needed to pay dividends, people sell not only bad assets, but also those that can quickly be converted into cash.

Goldman Sachs has explicitly noted that gold's high liquidity makes it a natural source of cash if investors need to cover cash needs during a market sell-off.

Gold ETFs and futures funds create particularly strong price pressure. The World Gold Council notes that physically backed gold ETFs are an important source of investment demand, with their database covering over 100 such products worldwide. When ETFs receive inflows, this supports gold. When selling begins, the pressure quickly transfers to the price.

In 2026, this factor became even more noticeable. MarketWatch reported that in January, inflows into gold ETFs reached a record $19 billion, with ETF demand becoming one of the main drivers of volatility. However, this demand has a downside: if the price of gold begins to decline sharply, loss-sensitive investors can exit their positions just as quickly, exacerbating the decline.

Large sell-offs trigger a chain reaction. First, funds and algorithms sell gold. Then the price breaks through key levels, stops are triggered, and pressure intensifies on the futures market. Then, small investors join in the selling, seeing news of the decline and starting to panic. At this point, financial media often report that bonds and cash are the best way to ride out the crisis.

For an individual investor, such panic is often a mistake. Unlike a fund, a private investor doesn't have to report to clients every quarter. They don't need to look good in front of the risk committee. If they bought gold as a long-term hedge, a temporary decline in itself isn't a reason to sell the asset.

The main difference between a private investor and a fund is that a fund often protects its financial statements, while a private investor can protect capital over the long term. This is why some sell gold during declines, while others use such periods to gradually accumulate.

Ultimately, selling gold during a crisis doesn't always mean the market has lost faith in gold. Often, it's simply a technical and managerial response by major players: to reduce risk, post a calm financial report, avoid capital outflow, and wait out a period of high volatility.

But history shows that long-term investors aren't obligated to replicate the funds' actions. They have a different goal: not to win a quarterly report, but to preserve and grow their capital over many years.