Gold prices have retreated below the $5,000 per ounce threshold as the conflict in the Middle East enters its third week, with investors weighing the impact of high oil prices on global inflation and the subsequent pressure on monetary policy.
- Geopolitical uncertainty clouds economic outlook
- Monetary policy outlook shifts as rate cut bets diminish
- Stagflation risks provide underlying floor for bullion
- War premium absent as gold fails to ignite
- Energy-driven inflation counters traditional haven appeal
- Greenback emerges as preferred liquidity haven
- Gold volatility remains muted despite regional escalation
- Waning central bank demand removes critical support level
The yellow metal declined after recording its second consecutive weekly drop, pressured by rising energy prices and inflationary fears stemming from the war involving the United States, Israel, and Iran. This geopolitical escalation has bolstered the likelihood that the US Federal Reserve will reduce the number of anticipated interest rate cuts. Crude oil prices fluctuated above the $100 per barrel level on Monday.
Geopolitical uncertainty clouds economic outlook
The ambiguity surrounding the duration of the conflict makes it difficult to assess its broader impact on markets and the economy. An aide to US President Donald Trump stated the conflict could last between four and six weeks, even as both sides send mixed signals. Trump indicated that Iran wishes to reach an agreement, but the US requires better terms, while Tehran maintained it has not requested talks or a ceasefire.
During the weekend, the US attacked Iran’s primary oil export centre, while Tehran continued strikes against energy infrastructure in several countries along the Gulf. Traffic remains nearly at a standstill through the Strait of Hormuz, the strategic maritime corridor through which a fifth of the world’s oil and liquefied natural gas trade typically passes.
Monetary policy outlook shifts as rate cut bets diminish
As the war persists, the probability of interest rate cuts has diminished. The latest US consumer spending data, released Friday, showed that spending barely rose in January due to weaker-than-expected economic growth, even before the war broke out. Meanwhile, US consumer confidence fell to its lowest level in three months as concerns grew over the conflict’s impact on petrol prices.
Traders now see a very slim chance of a rate cut at the Federal Reserve meeting this week. High borrowing costs typically weigh on precious metals, which do not yield interest. Kyle Rodda, an analyst at Capital.com, said short-term gold movements appear “mechanical” as the metal reacts to dollar fluctuations and rate expectations. However, he added that the war could support gold in the long term because the conflict “increasingly undermines confidence in the United States among adversaries and even allies.”
Stagflation risks provide underlying floor for bullion
Despite the pause in upward momentum since the war began, the metal remains up by approximately 15% since the start of the year. Fears of stagflation—a combination of slowing growth and rising inflation—could drive investors toward gold as a better long-term store of value. However, Rodda noted these positive effects might remain limited if central banks raise interest rates aggressively to control inflation.
Spot gold fell 0.6% to $4,987.11 per ounce at 09:24 London time. Silver dropped 2.2% to $78.79, while platinum rose and palladium remained stable. The Bloomberg Dollar Spot Index fell 0.2% after rising by more than 1% during the previous week.
War premium absent as gold fails to ignite
Since the outbreak of the war with Iran on February 28, it seemed natural for many to bet on a strong jump in gold prices, as the metal remains the primary safe haven when risks rise. However, the outcome this time was different. Although gold has remained up about 18% since the start of the year and maintained trading largely above $5,000, it failed to build a new upward wave. Instead, it moved within a relatively narrow range and declined in some sessions despite risks to energy, trade, and inflation.
In Friday’s trading, the metal rose slightly toward $5,100, recovering some losses after a two-day decline, but remained on track for a weekly drop of about 1.6%, potentially marking the first consecutive weekly decline since November. Paradoxically, the factors expected to support gold turned into pressure points, making the metal appear less bright than anticipated.
Energy-driven inflation counters traditional haven appeal
The primary cause lies in the energy market. The war disrupted oil production and refining in the Middle East and causedshipping disturbances in the Strait of Hormuz, pushing Brent crude to stay near $100 per barrel. Usually, escalating geopolitical risk supports gold directly. However, the market viewed the war through the lens of rising energy prices and inflation, increasing the likelihood of interest rates remaining tight for longer. Gold maintains an inverse relationship with US rates.
Furthermore, while US core inflation slowed in February, this reading was insufficient to reassure investors as it predated the war. The market focus shifted to what might happen if energy prices continue to rise. Consequently, oil did not push gold higher; rather, it contributed to its weakness via the inflation channel. Rising oil prices increased inflation expectations, which in turn reduced the chances of rate cuts, pressing down on gold.
This pressure transitioned to monetary policy. With rising inflationary fears, markets began repricing the path of US interest rates. Bets on a quick rate cut shrank as energy prices climbed. These expectations were further hit by US data showing new unemployment claims remained at low levels, reinforcing the belief that the economy is resilient enough to keep policy restrictive. Traders currently see almost no chance of a rate cut at next week’s Federal Reserve meeting, with markets pricing in an 80% chance of only one cut this year. This represents a challenge for gold, as higher opportunity costs limit its attractiveness in investment portfolios.
Greenback emerges as preferred liquidity haven
In times of major crisis, an asset must be highly liquid as well as safe. The dollar has regained a clear advantage over gold. When investors feel risks are expanding rapidly, many move toward the most easily liquidated asset—the dollar—rather than gold. This flight to liquidity supported the greenback and pressured gold. However, the metal did not lose its defensive status entirely, evidenced by the fact that it did not drop below pre-war levels.
This dynamic is clear in the broader landscape. Pressure extended to other traditional safe havens; the Japanese yen fell by more than 1% against the dollar in the week following the war, while the euro fell by more than 1.7%, indicating a market preference for dollar liquidity.
Additionally, as oil rose and inflation fears grew, bond markets faced a sell-off, pushing yields higher. US Treasuries fell on Thursday, sending short-term yields to their highest levels since August. Rising yields are a direct negative for gold asa non-yielding asset.
During the war’s volatility, gold also functioned as a source of liquidity. When other parts of a portfolio suffer losses, selling gold is one of the fastest ways to obtain cash. This explains the decline in gold held in exchange-traded funds (ETFs) since the war began; holdings recorded their largest weekly drop in over two years last week, despite new inflows on Tuesday. The SPDR Gold Shares fund witnessed a significant one-day redemption, as some investors sold gold specifically to provide liquidity.
Gold volatility remains muted despite regional escalation
Notably, gold’s implied volatility has been weaker than that of the S&P 500 since the war broke out, an unusual disparity in such crises. If gold were moving as a direct geopolitical hedge, its volatility would typically spike with military news.Instead, the gold volatility index on the Chicago exchange retreated from recent highs, with spot prices moving in a narrow range since late February despite sharp fluctuations in the oil market. This suggests gold did not form a clear “war premium” but acted as an asset absorbing part of the shock in a turbulent market, while trading settled near $5,200.
Waning central bank demand removes critical support level
If official demand for gold had maintained its previous momentum, the market might have better absorbed these pressures. However, the picture changed at the start of the year. Net central bank purchases reached only 5 tonnes in January, compared to a monthly average of 27 tonnes during 2025, according to Bloomberg. This represents a clear slowdown in one of the most important pillars of long-term support for the metal. Central bank buying has been a key factor in stabilising the bull market and supporting prices at high levels in recent years; as this momentum fades, the market becomes more sensitive to pressures from the dollar, yields, or investor exits.
