Several factors may explain the recent trend in the price of gold. Firstly, the sharp fall in the price of gold following the war in Iran suggests that investors had already anticipated the geopolitical risks by increasing their holdings of gold.
From a fundamental perspective, the appreciation of the US dollar and the rise in long-term interest rates have both been major headwinds for gold. As the United States is a net oil exporter, it is less affected by fluctuations in oil prices than other regions such as Europe, which has bolstered the dollar and weighed on the euro.
The significant shift in market expectations regarding central bank interest rates has been a decisive factor. Before the conflict, the market had anticipated nearly three 0.25% rate cuts by the Fed over the next twelve months. To date, these expectations of rate cuts have completely faded. Similarly, the markets have shifted from forecasting half a rate cut by the European Central Bank to three rate hikes over the same period. The price of gold has therefore reacted negatively to the rise in long-term interest rates, which factor in expectations of future short-term rates.
The outlook for gold remains positive
It is also worth highlighting another key factor behind the recent correction in the price of gold. Some central banks in oil-importing countries have been forced to partially liquidate their gold reserves in order to stem the depreciation of their currencies. This phenomenon has been particularly evident in India and Turkey. Indeed, as the price of oil is denominated in dollars, the depreciation of the Indian rupee and the Turkish lira has only exacerbated the economic situation in these two nations.
The correlation between the various asset classes since the start of the conflict is clear: when oil prices rise, equity markets and gold fall, whilst the dollar and bond yields rise. As soon as a ceasefire is agreed and maritime traffic returns to some semblance of normality in the Strait of Hormuz, the opposite effect is likely to occur: a fall in oil prices, a rise in equities and a rebound in the price of gold. The latter will be supported by falling bond yields and a weaker US dollar.
In the long term, the investment case for gold remains unchanged. The erosion of the Fed’s independence, geopolitical fragmentation, central banks’ diversification of assets away from the US dollar, and high levels of public debt in developed countries are all factors that favour gold. The current crisis has even reinforced some of these positive factors for gold in the long term.
A third of US debt is due for repayment
Finally, we must not overlook the dynamics of US debt. According to the latest data for the first quarter of 2026, nearly 33% of publicly held US marketable debt is due to mature within the next 12 months. However, international investors’ appetite for US debt is waning, as recent data shows. So who will refinance this debt? The answer is likely the central bank, which has already resumed buying short-term government bonds. Whilst the Federal Reserve states in its press releases that government bond purchases are intended to ‘manage’ the financial system’s reserves, it would be naïve to ignore the implicit objective of financing colossal public deficits. This change of course by the Fed is good news for gold investors. Previous phases of expansion in the Fed’s balance sheet have resulted in both a depreciation of the dollar and a rise in the price of gold.
As the Chair of the Federal Reserve pointed out last week, the institution will disregard the short-term rise in inflation, provided that longer-term inflation expectations remain firmly anchored. Consequently, the markets have quickly ruled out the possibility of any interest rate rises. Once hostilities in the Middle East come to an end, interest rates and the dollar are expected to start falling, which would benefit the price of gold. A great opportunity to seize.
