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The outbreak of the Iran conflict should have been gold’s moment to shine. Instead, the opposite has happened. Since the fighting began, gold prices have fallen 14%, including one of the steepest single-day declines in recent years last week. Why has the traditional safe haven failed to deliver this time?
The answer may be surprising. In the face of higher interest rates, a stronger dollar, and competing demands for liquidity, geopolitics alone is no longer enough to drive a sustained rally in gold.
Gold’s fundamental drivers have not changed. It remains most vulnerable to two things: rising rates and a strong dollar. When rates are low, the opportunity cost of holding gold is minimal. When rates rise, investors shift toward assets like bonds that offer predictable yields.
This time, geopolitical tensions have reinforced both headwinds.
The conflict has pushed energy prices higher, making it harder to bring inflation under control. The Federal Reserve held rates steady last week, with Chair Jerome Powell making clear that further easing would require clearer progress on inflation. Aakash Doshi, Head of Global Gold and Metals Strategy at State Street Investment Management, noted: “Before the conflict broke out, markets were pricing in two rate cuts from the Fed. Now the market has priced in no easing this year.”
A “higher for longer” rate environment keeps the opportunity cost of holding gold elevated. That is the first layer of the downward pressure.
Even with macro headwinds, gold might still hold its ground as a haven. But last week’s “Black Thursday” in precious metals showed that even this support is weakening under the weight of liquidity needs.
Investors are selling gold to cover losses elsewhere. Margin calls triggered by falling stock markets, combined with a sharp rotation into energy stocks, have turned gold from a safe haven into a source of cash. Suki Cooper, Head of Global Commodities Research at Standard Chartered, summed up the dynamic: “Liquidity needs in other areas have surpassed the geopolitical risk premium embedded in gold.”
Institutional flows confirm the trend. The world’s largest gold ETF, SPDR Gold Trust (GLD.US), posted six consecutive sessions of net outflows. Trend-following Commodity Trading Advisors (CTAs) have also been trimming their gold positions. Tom Wrobel, Head of Capital Consulting for Institutional Brokerage at Société Générale, said that while CTAs likely still hold long positions, their risk exposure has come down significantly.
This is not the first time gold has behaved this way. When the Russia-Ukraine conflict broke out in 2022, gold initially rallied on safe-haven demand. But as energy prices surged and inflation took hold, markets quickly refocused on Fed tightening and dollar strength. Gold then fell for seven consecutive months from April to October.
The ING research team pointed out that this pattern underscores a key insight: geopolitics rarely drives gold prices on its own in a sustained way. What matters is how such shocks feed through to inflation, monetary policy, and the dollar. In the early stages of a crisis, liquidity needs often outweigh pure safe-haven demand.
In the near term, gold’s direction will depend less on geopolitical headlines alone and more on how those events shape inflation, interest rates, and the dollar. A stronger dollar and gold’s high liquidity make it a potential source of funds during periods of market stress.
Longer term, the picture is more nuanced. If geopolitical tensions continue to push energy prices higher while weighing on growth, a stagflationary backdrop would ultimately provide structural support for gold. But for now, one thing is clear: in the face of macro forces, geopolitics has not been enough to turn the tide.
