By Alexander Jones, International Banker
2026 has been a puzzling year for gold. After embarking on a monumental upward march through the fourth quarter (Q4) of 2025 that saw the metal’s price climb to an all-time peak of around US$5,600 per ounce in late January 2026, the yellow metal reversed course in early March, erasing much of those previous gains. Although a powerful rebound took spot gold close to $4,700 in late August, the advance faltered as expectations of tighter US monetary policy returned, and bullion eventually surrendered those gains during September. So, why has a conflict that would ostensibly encourage safe-haven buying failed to produce a sustained rally in gold prices?
The first few days of hostilities saw demand for gold rise as investors sought protection against geopolitical risk. The threat to Gulf energy supplies, however, quickly raised oil prices, inflation expectations, prospective interest rates, US Treasury yields and the dollar. As such, returns from interest-bearing dollar-denominated assets rose, while gold—which generates no income—weakened, with profit-taking, forced sales and exchange-traded fund (ETF) withdrawals leading to the metal’s price decline. “The market is looking at higher oil prices and the potential for inflation, while higher Treasury yields usually aren’t great for gold,” Bart Melek, TD Securities’ global head of commodity strategy, told Reuters during the conflict’s opening week.
A crisis dominated by weakening demand would normally prompt interest-rate cuts, which, in turn, tend to support gold. Skyrocketing energy prices stemming from US-Iran hostilities, however, promptly caused leading central banks to assume more hawkish monetary-policy postures. “Change isn’t easy. Change is filled with risk. But our number one goal is to get monetary policy right,” the Federal Reserve’s (the Fed) chairman, Kevin Warsh, said when discussing price stability in June 17. “The way to get monetary policy right is to deliver on the remit that Congress gave us to deliver on price stability.” That concern translated into policy on September 16, when the Fed raised its target interest rate range by 25 basis points to 3.75–4.00 percent, citing elevated inflation alongside resilient economic activity.
Bond yields have subsequently translated that inflation risk into a direct disadvantage for bullion. Using quarterly data from 2000 onward, the World Gold Council’s (WGC) 2026 mid-year outlook estimated that a 25-basis point fall in the 10-year US Treasury yield would raise gold by approximately 1.75 percent, with other factors unchanged. With yields rising considerably since the war began, the opportunity cost of holding gold instead of Treasuries has correspondingly risen.
Dollar movements have amplified both gold’s weakness and its recovery.
Dollar movements have amplified both gold’s weakness and its recovery. With the metal being priced internationally in dollars, a stronger US currency makes it more expensive for buyers using other currencies. Dollar weakness helped support the August rally, whereas renewed dollar strength added to the pressure on bullion in September. Investors’ choice between gold and interest-bearing dollar assets has therefore shifted as exchange rates and expectations for US rates have changed.
The June sell-off was reflected in physically backed gold funds, with the World Gold Council (WGC) recording $8.9 billion of net outflows worldwide, as combined holdings in global gold ETFs fell by 74 tonnes during the month to 4,047 tonnes. North American funds accounted for $5.5 billion of those June withdrawals and $7.7 billion of net outflows during the first half of 2026, with the Council attributing this regional trend in part to rising real yields and a stronger dollar, as investors anticipated that higher US rates were in the offing. Real yields measure bond returns after adjusting for expected inflation—as that return rises, justifying the continued retention of an asset with no income-generating component becomes increasingly difficult.
The most revealing reactions occurred when hopes of de-escalation supported gold. An end to hostilities threatened some safe-haven buying, yet also promised lower oil prices, weaker inflation pressure and greater scope for rate cuts. “An end to the conflict could prove a double-edged sword (for gold). On one hand, a lasting peace agreement would remove the geopolitical safe-haven bid that supported prices in the run-up to the conflict,” IG market analyst Tony Sycamore told Reuters in April. “On the other hand, lower oil prices and easing inflation could revive expectations of 2026 Fed cuts, which could help prices.”
A similar pattern transpired when the US and Iran agreed to ceasefire terms on June 17. “The gold market is moving past the conflict and pricing it out,” Phillip Streible, chief market strategist at Blue Line Futures, told Reuters. “The peace deal news took down Treasury yields, the dollar and oil, and those were the biggest inflation and cross-asset risks.” Gold started to rise by the end of June as those inflationary pressures eased, with the metal’s price gaining almost 4 percent in the week to July 6. But with hostilities resuming on July 8, rising oil prices and growing expectations of interest-rate hikes put downward pressure on gold once again.
August did see something of a reversal as gold gained 13.3 percent over the month, with support coming from a weaker dollar, renewed gold-fund buying and increased futures positions. Although spot bullion reached a three-month high of $4,696 an ounce on August 25, the recovery cooled after Fed Chairman Kevin Warsh stressed the need for progress on inflation in an August 28 speech. Following the Fed’s September rate increase, moreover, renewed oil price gains and rising Treasury yields weighed on gold once again. By the end of September, bullion’s spot price had fallen to around $4,150, thereby erasing virtually all of the August rally.
It should also be highlighted that gold had already been vulnerable to a pronounced sell-off this year due to its exceptional preceding rally. According to the London Bullion Market Association (LBMA), its benchmark price gained 25 percent during January before reaching a record high on January 29. The WGC estimated that momentum-related trading—including trend-following, changes in investor positioning and profit-taking—accounted for 24 percent of gold’s monthly price movements during the first half of 2026. The earlier rise had therefore become partly self-reinforcing; once prices turned lower, much of the same trading behaviour intensified the decline.
Indeed, the war created an immediate need for cash as rising oil prices and market sell-offs generated losses and, as a result, sizeable margin calls. Former LBMA chairman David Gornall described gold as “the most accessible cash machine”, referring to its deep, accessible market, which allows investors to rapidly sell their substantial holdings to obtain liquidity. A falling price during periods of market stress can thus reflect gold’s versatility rather than the absence of longer-term protective demand.
Nonetheless, the metal still has significant pockets of support, which might suggest a more upbeat long-term outlook. Physically backed gold funds worldwide attracted $18 billion in August, lifting their combined holdings by 121 tonnes to a record 4,189 tonnes, according to the WGC. North American funds drew approximately $7.7 billion during the month, reversing their earlier first-half outflows and bringing the region’s year-to-date flows modestly back into positive territory. Asian-listed funds remained the largest contributor to global inflows over the first eight months of 2026. These shifts suggest that fund demand responds rapidly to changes in the dollar, yields and investor appetite for protection.
Central banks represent another crucial source of long-term support for gold, with the WGC finding that they purchased an average of approximately 1,000 tonnes annually during the four years through 2025, twice the annual average recorded over the preceding decade. Furthermore, 66 of the 74 central banks surveyed this year expected global official gold holdings to increase during the following 12 months. A record 45 percent of the reserve managers surveyed also expected to increase their own institutions’ gold holdings over the next 12 months, while 83 percent of respondents believed gold would account for a higher share of total reserves in five years, up from 76 percent last year. The People’s Bank of China, for example, reported buying 20 tonnes of gold in August, its largest monthly addition since October 2023.
“This year’s survey sends a clear message: central bank demand for gold remains on an upward trajectory,” said Shaokai Fan, the Council’s global head of central banks. “A record number of respondents plan to add gold to their own reserves in the next year, while a large majority expect global official sector holdings to keep rising. What stands out is the shift in how central banks think about gold. Fewer see it as a legacy holding; more see it as an active, strategic allocation in an environment defined by geopolitical uncertainty and reserve diversification.” Such buyers can accumulate over years, while funds and traders respond within days to yields, currencies and volatility.
Ultimately, gold’s uneven performance this year reflects the competing effects of the Gulf conflict rather than a decisive failure of its role as a safe-haven asset.
Ultimately, gold’s uneven performance this year reflects the competing effects of the Gulf conflict rather than a decisive failure of its role as a safe-haven asset. The energy shock raised inflation concerns and the attraction of interest-bearing dollar assets, helping drive the earlier sell-off. When the dollar weakened and investors returned to gold funds, bullion rallied strongly in August, but when rate expectations and Treasury yields rose again in September, gold’s recovery faltered. Central bank purchases and investment demand remain sources of support, but a sustained advance will depend on whether they can outweigh the pressure from US rates, bond yields and the dollar.