Why gold prices tumbled despite the Iran conflict
Megha Bahree
Gold prices have plunged from a January peak despite rising geopolitical tensions. High inflation and prospects of a Federal Reserve rate hike are driving the decline. Strong U.S. dollar demand is also weighing on the precious metal.
In times of global crisis, gold usually surges as investors seek a safe haven against inflation. But this time the trend has reversed.
Since the U.S. and Israel struck Iran in late February, touching off a months-long war, gold has come under persistent selling pressure. From a peak of $5,303 per troy ounce (31.1 grams) on Jan. 28, gold fell to $4,235 an ounce by the end of last week.
The main cause is soaring inflation, which has stoked fears that central banks will not cut rates and may even raise them to contain prices. The root of this inflation shock largely lies in the Strait of Hormuz.
In retaliation against the U.S. and Israel, Iran shut the strategic waterway as soon as hostilities broke out, severing the main artery for oil and gas shipments. Surging energy prices then fanned broader inflation.
In the United States, inflation hit a three-year high of 4.2%. Meanwhile, the labor market remains stable, dashing hopes of an early Fed rate cut. Gold has traditionally been viewed as an inflation hedge, but high rates weigh on the metal.
Justin Cardwell, senior options analyst at OptionSpreaders.com, explains: "Gold is the closest asset to real money. It pays no dividends and generates no intrinsic value until its price rises. People buy gold because they expect its value to increase." That puts interest rates in direct competition with gold.
"Gold loses its appeal when rates are high and money flows into the U.S. dollar," Cardwell stressed.
The Iran conflict benefits the dollar. Since gold is priced in dollars, the two assets move in opposite directions. Collin Plume, CEO of Noble Gold Investments, said: "When the dollar strengthens, gold is under pressure; when the dollar weakens, gold rises. Right now the dollar is very strong, and gold is taking the hit."
Before the Iran war, President Donald Trump pressured the Fed to cut rates sharply. But according to the CME FedWatch tool, the probability of a Fed rate hike in December now exceeds 50%.
"Rates and inflation are like two ends of a seesaw, and gold sits in the middle. The problem in 2026 is that both are happening at once, and for now rates are winning," Plume said.
Late last week, news of a potential U.S.-Iran deal emerged, and gold closed slightly higher than the previous day. "News that the war might end is positive for gold because it implies inflation will cool," Cardwell said.
Yet the process could take months. "Even if the war ends, there are still too many other factors holding gold back," Cardwell concluded.
