This is a very well written article by Mr. C of Hong Kong, China.
Following the outbreak of the US-Iran war, gold prices unexpectedly fell instead of rising. This caught many investors off guard — particularly those who believed that gold should be bought during times of geopolitical turmoil — resulting in heavy losses.
The market has offered various explanations for this counterintuitive phenomenon. Some attribute the decline in gold prices to a severe liquidity crunch. The fear triggered by the war prompted investors to sell assets aggressively to raise cash. As a result, apart from oil prices surging sharply, almost all other asset classes experienced heavy selling pressure, causing prices to fall rapidly. Leveraged investors, in particular, may have faced margin calls. With gold being one of the few positions still showing a profit, many were forced to sell their gold holdings to meet these calls and cover urgent liquidity needs.
Another explanation is that the sharp rise in oil prices could fuel inflation, prompting the Federal Reserve to reverse course and resume interest rate hikes. Since gold yields no interest and incurs storage costs, higher interest rates would highlight the opportunity cost of holding it, encouraging capital to exit the gold market.
A third theory suggests that countries already facing economic difficulties saw their currencies come under severe pressure after the war broke out. Central banks of these nations had little choice but to sell gold reserves and use the proceeds in US dollars to buy back their own currencies in order to support exchange rates. Turkey was cited as a clear example of this behavior.
Additionally, the countries directly involved in the conflict are major oil producers with substantial “petrodollars” that they normally invest globally. Once hostilities began, their oil exports were disrupted, causing a sharp drop in revenue. As a result, they were forced to sell gold to generate emergency liquidity, adding further downward pressure on gold prices.
While all the above explanations sound plausible, the true underlying cause of the gold price decline remains unclear. In any market, both bullish and bearish factors always coexist. Therefore, regardless of whether prices rise or fall, it is never difficult to find seemingly logical explanations after the fact. The real question is whether these explanations can reliably guide future investment decisions.
If we follow the logic of the reasons mentioned earlier — that war causes gold prices to fall — then one might assume that any signs of peace or reconciliation would lead to a rebound in gold prices. However, I believe this may not necessarily be the case. In my view, whether gold prices rise or fall after the war will ultimately depend on which side emerges victorious.
The victor will seize the spoils of war, gain control over the redistribution of regional resources, and exert significantly greater influence over the global order.
I believe the main reason gold prices fell sharply in the early stages of this conflict is that the United States achieved a swift and decisive victory. By eliminating Iran’s top leadership in one stroke, the US created the possibility of regime change and the installation of a pro-American government in Iran. Should the US succeed in this strategic objective, it would bring the majority of the world’s oil resources under its effective control. If America could then persuade Russia to join it in containing China, China’s rise might be stalled due to energy shortages. This would remove China as a major strategic threat, allowing the United States to solidify its position as the unchallenged global hegemon. In such a scenario, no country would dare push for de-dollarization. Anyone showing the slightest defiance could be dealt with in the same manner as Iran.$D