Gold Prices Are Sliding During a Geopolitical Crisis. What's Going On?

Gold has traditionally been the asset investors flock to during wars, geopolitical crises and periods of heightened uncertainty. Yet the precious metal is defying that pattern.

Despite renewed military exchanges between the United States and Iran and growing concerns over the Strait of Hormuz, gold has remained under pressure. Instead of rallying on safe-haven demand, bullion has extended its decline, reflecting a shift in what investors believe matters most for prices.

The reason lies in the complex relationship between geopolitics, inflation, interest rates and the US dollar.

Gold Extends Its Losing Streak

Gold prices have been declining for four consecutive months despite escalating tensions in West Asia.

Spot gold was trading near $4,060 an ounce on Monday, while US gold futures also weakened, taking monthly losses to more than 10%.

Ordinarily, military conflict involving major global powers would trigger a rush into gold as investors seek safety. This time, however, markets are reacting differently.

Rather than focusing solely on geopolitical risks, investors are paying closer attention to how the conflict is affecting oil prices, inflation and the outlook for US monetary policy.

Why Higher Oil Prices Are Hurting Gold

The biggest factor weighing on gold is the sharp rise in crude oil prices following the latest military exchanges between Washington and Tehran.

Oil prices climbed after Iran launched missiles and drones targeting US military facilities in Kuwait and Bahrain over the weekend. The attacks renewed fears that tensions in the Gulf could disrupt energy supplies or keep oil prices elevated for longer.

While geopolitical uncertainty typically supports gold, rising oil prices create a different set of concerns.

Higher crude prices increase transportation and manufacturing costs worldwide, feeding into broader inflation. When inflation remains elevated, central banks are generally less willing to cut interest rates and may even tighten monetary policy further.

That changes the investment equation for gold.

Unlike bonds or fixed-income securities, gold does not generate interest or dividend income. When interest rates rise, investors can earn higher returns from interest-bearing assets, reducing the attractiveness of holding non-yielding assets like bullion.

Federal Reserve Expectations Are Driving Markets

The outlook for US interest rates has become one of the biggest drivers of gold prices.

Markets increasingly expect the Federal Reserve to maintain tight monetary policy for longer as inflation risks remain elevated.

According to CME FedWatch, traders are pricing in multiple interest-rate increases this year, with a high probability of another hike before the end of the year.

Higher policy rates generally push government bond yields higher while strengthening the US dollar.

Both developments tend to weigh on gold.

A stronger dollar makes gold more expensive for overseas buyers because bullion is priced globally in US currency. At the same time, rising Treasury yields encourage investors to move money into fixed-income assets that now offer better returns.

As a result, even heightened geopolitical tensions have struggled to offset these macroeconomic pressures.

Why Safe-Haven Buying Has Been Limited

Historically, wars have almost always supported gold prices. During periods of geopolitical uncertainty, investors typically reduce exposure to riskier assets such as equities and seek refuge in safe-haven investments like gold.

This time, however, investors appear more concerned about the economic consequences of the conflict than the conflict itself.

The latest confrontation has pushed energy prices higher, reinforcing concerns that inflation could remain stubbornly high.

Instead of encouraging expectations of monetary easing, the conflict has increased the possibility that central banks will delay interest-rate cuts or tighten policy further.

That has significantly diluted gold's traditional safe-haven appeal.

Bullion has remained under pressure ever since the US and Israel launched military operations against Iran earlier this year, as rising oil prices strengthened expectations that interest rates would remain elevated.

Can Gold Recover?

Analysts believe gold's next move will depend on three interconnected factors: geopolitical developments, crude oil prices and US monetary policy.

If tensions between Washington and Tehran begin to ease, oil prices could retreat as fears of supply disruptions diminish.

Lower crude prices would help reduce inflationary pressures, allowing markets to revive expectations that the Federal Reserve may eventually lower interest rates.

That combination would typically support gold prices.

A weaker US dollar would provide an additional boost by making bullion cheaper for international investors.

Waterer believes gold could revisit the $5,000-an-ounce level later this year if geopolitical tensions ease, crude prices return closer to pre-conflict levels and the dollar weakens alongside expectations of monetary easing.

Markets are likely to remain highly sensitive to both geopolitical and economic developments in the coming days.

The United States and Iran have agreed to suspend military operations following several days of escalating attacks around the Strait of Hormuz, according to media reports citing a US official.

The development is expected to ease tensions along one of the world's most critical maritime trade routes and revive diplomatic efforts to preserve the fragile ceasefire reached earlier this month.

Investors will also closely monitor whether commercial shipping through the strategic waterway continues without disruption, as any renewed attacks could quickly push oil prices higher again.

On the economic front, US labour market data—including the ADP employment report and the monthly non-farm payrolls figures—will be watched for fresh clues about the health of the economy and the Federal Reserve's next policy decision.

Comments from Fed officials throughout the week could further shape expectations for interest rates and, by extension, gold prices.