Why Gold Is Falling During a War And Why That Misses the Bigger Picture

One of the most disorienting things happening in financial markets right now is the behavior of gold. By every conventional piece of investment logic, a full-scale military conflict in the Middle East, surging oil prices, mounting inflation fears, and genuine uncertainty about the global economic outlook should be sending investors flooding into precious metals. Gold is supposed to be the ultimate safe haven. It is the asset people reach for when everything else feels uncertain.

And yet, gold has been falling.

For investors who hold precious metals as a core part of their financial strategy, the confusion is real and understandable. The asset that was supposed to protect them during exactly this kind of crisis is not behaving the way the textbook says it should. To make sense of what is actually happening, and why the long-term case for gold remains firmly intact, requires separating the short-term mechanics of how gold trades from the fundamental drivers that have powered the metal’s extraordinary multi-year run.

The Problem With Geopolitical Buying

For experienced precious metals analysts who have followed gold for decades, the current pattern is not entirely surprising. Geopolitical events have always been among the least reliable triggers for sustained gold price appreciation. The reason is structural rather than arbitrary.

When a geopolitical crisis erupts, it brings a specific type of market participant into the gold trade: short-term traders who are buying the headline rather than the fundamental thesis. These are not long-term holders who understand the monetary dynamics behind gold’s multi-decade bull market. They are tactical buyers responding to a news event, and their participation in the market creates a problem that experienced gold investors have seen play out repeatedly throughout history. Eventually, the crisis either resolves, de-escalates, or simply fades from the news cycle. When it does, the short-term traders exit. And that exit creates selling pressure that temporarily overwhelms the underlying fundamental demand.

This pattern has repeated across virtually every major geopolitical event of the past twenty-five years. In almost every instance, the initial geopolitical spike in gold was followed by a selloff that took months to work through as the tactical buyers cleared out. The underlying fundamentals that actually drive gold’s long-term performance, dollar sentiment, fiscal deficits, central bank credibility, did not change during that process. The price did, temporarily, because the composition of who was holding gold changed.

There was a notable exception to this pattern in late 2024, following the October 7th events in Israel. For the first time in a long time, gold stocks did not follow gold higher in the initial spike, an indication that sophisticated market participants had become skeptical of the geopolitical premium and were positioning accordingly. The market had, in a sense, learned from repeated experience that geopolitical buying tends to be a setup for the geopolitical selloff.

The current situation, however, is at a different level of severity than most prior geopolitical events. The scale and potential economic consequences of the Iran conflict, particularly the disruption to oil markets and the damage to critical energy infrastructure, place it at the very top of the geopolitical risk spectrum. The question is whether this particular crisis is large enough and persistent enough to override the typical pattern of short-term excitement followed by tactical exit.

What Actually Drives Gold Over the Long Term

To understand why the long-term case for gold remains compelling despite the short-term price pressure, it helps to understand what has actually driven the metal from approximately $250 per ounce two decades ago to the levels it has reached today. That extraordinary appreciation, a 15-fold or greater increase depending on the specific time period, was not driven by geopolitical crises. It was driven by three fundamental variables that have been building for twenty years and reached genuine inflection points in 2024 and 2025.

The first is anti-dollar sentiment. The decision by Western governments to freeze Russian foreign exchange reserves following the 2022 invasion of Ukraine was a watershed moment for the global monetary system. For the first time, reserve asset managers around the world had concrete evidence that dollar-denominated assets held within the international financial system could be made inaccessible by political decision. Central banks, particularly in the global south and in countries that consider themselves potentially exposed to Western sanctions, responded by accelerating their gold purchases. This was not a speculative trade. It was a structural reallocation of reserve assets away from instruments subject to political risk and toward physical gold held outside the international settlement system.

The second driver is the US fiscal deficit. Government spending at levels that would historically have been associated only with wartime emergencies has become normalized during peacetime. The compounding effect of persistent deficits on the real value of the dollar is not a short-term phenomenon. It is a slow, structural erosion that has been underway for decades and shows no meaningful sign of reversing.

The third driver is Federal Reserve credibility, or more precisely, the erosion of it. The decision in 2021 to maintain $120 billion per month in quantitative easing at a moment when GDP growth was running at 6%, inflation was already rising from 5% toward 7%, and unemployment was declining, will likely be recorded as one of the most consequential monetary policy errors in the Fed’s history. The cost of that error in terms of institutional credibility, the confidence of markets that the Fed will make sound decisions when the moment requires it, has been substantial and lasting.

All three of these variables reached inflection points simultaneously in 2024 and 2025, which explains the acceleration in gold’s performance during that period. Gold was up approximately 65% in 2024. Silver rose approximately 145%. In January 2025 alone, gold added another 30% and silver added approximately 70%, a pace that by late January had clearly moved into blowoff-top territory.

The January Correction and the Recovery

The correction that followed that blowoff was sharp. From peak to trough in the period between late January and early February, gold fell approximately 21%. Silver, which is more volatile by nature, fell approximately 41% from top to bottom tick. Financial media responded as it typically does to sharp corrections in assets that had been moving strongly, with commentary about the end of the precious metals bull market.

What actually happened was more instructive. By March 2nd, gold had recovered to approximately $5,400 per ounce, essentially matching the January peak that had been characterized as unsustainable. Silver recovered to approximately $103, short of the January high but substantially recovered from the correction lows. The bull market that the financial press declared over had, within roughly thirty days, returned to its prior highs.

This recovery pattern matters because it illustrates the underlying strength of the fundamental demand for gold at current price levels. Corrections driven by technical factors, leverage unwinding, and short-term trader exits are real and can be sharp. But when the fundamental buyers, central banks, long-term institutional holders, investors protecting purchasing power against dollar debasement, are present at scale, those corrections get bought.

The Oil-Inflation-Rate Hike Error

The specific mechanism behind gold’s current weakness is worth understanding carefully, because it involves what is likely to be a significant analytical mistake by the market.

The Iranian conflict has produced a dramatic move in energy prices. Brent crude has risen to approximately $111 per barrel and WTI to approximately $99. The damage to the Qatari LNG facility, which provides approximately 20% of the world’s liquefied natural gas supply, was assessed as potentially requiring up to five years to fully repair. On the day that news broke, markets effectively abandoned any expectation of a quick resolution to the energy market disruption, even in a scenario where the geopolitical conflict itself de-escalates relatively quickly.

The market’s response to sharply higher oil prices has been to price in an inflationary outbreak and, consequently, to price in significant central bank tightening. Approximately 40 basis points of Bank of England rate increases have been priced into 2026. Approximately 50 basis points of ECB tightening have been priced in for the same period. On the Federal Reserve side, the 50 basis points of easing that had previously been expected has essentially been priced out entirely.

And gold, as an asset that competes with yield-bearing instruments in an environment of rising rates, has sold off in response to that expectation of tightening.

Here is where the analytical error becomes apparent. The assumption that central banks, and particularly the Federal Reserve, will respond to an oil-driven inflationary outbreak by raising interest rates ignores the current debt reality that makes aggressive tightening essentially impossible. At current debt levels, with interest costs already consuming a historically large share of government revenue, the Fed raising rates aggressively would not be fighting inflation. It would be triggering a credit and fiscal crisis that would be far more damaging than the inflation it was attempting to address.

The evidence that the Fed is not positioned to tighten aggressively is already visible in its own recent actions. As recently as December, the Federal Reserve introduced what it is calling reserve management purchases, a program involving $40 billion in Treasury bill purchases per month designed to protect short-term liquidity in the financial system. Since December, the Fed’s balance sheet has expanded by approximately $160 billion, entirely on the Treasury bill line. A central bank that is actively expanding its balance sheet by $40 billion per month to maintain system liquidity is not a central bank that is about to embark on a meaningful tightening cycle. The two positions are logically incompatible.

What Comes Next

The short-term dynamic in gold is driven by the market pricing in central bank tightening that is unlikely to materialize at the scale or pace that current expectations imply. When that expectation adjusts, either because the Fed explicitly signals it will not tighten, or because economic data makes clear that tightening would be destructive given current debt dynamics, the rate-driven headwind to gold will reverse.

The three fundamental variables that have driven gold’s long-term performance remain fully intact. Anti-dollar sentiment is not diminishing, if anything, a period of geopolitical instability and energy market disruption strengthens the case for reserve diversification away from dollar-denominated assets. The US fiscal deficit is not improving. Federal Reserve credibility is not recovering.

The geopolitical crisis that is currently creating short-term confusion in the gold market is, at the fundamental level, reinforcing the very conditions that have powered the precious metals bull market for the past two decades. Energy price shocks are inflationary. Inflation erodes purchasing power. Purchasing power erosion is exactly the condition that gold has historically addressed.

Getting through the short-term tactical noise, the geopolitical buyers who will eventually exit, the market’s temporary embrace of a tightening scenario that the underlying math cannot support, is the price of holding a position in an asset whose fundamental case has never been stronger.