Another 2% Down: War Usually Helps Gold, Why Not This Time?

Gold prices have fallen around 14% since the onset of the West Asia war, bucking traditional safe-haven logic. Despite heightened geopolitical risks, the asset is under pressure as rising oil prices and inflation concerns drive central banks to maintain or even consider raising interest rates. This shift has increased the cost of holding non-yielding assets like bullion.

The market is now near its weakest levels since early February, with brief rebounds failing to sustain gains above $4,700. The Bloomberg Dollar Spot Index fell 0.3% after rising more than 1% last week, further complicating gold's appeal. Higher U.S. Treasury real yields are also increasing the opportunity cost of holding gold.

Analysts are closely monitoring the Fed's stance and global oil price dynamics. A stronger U.S. dollar and elevated energy costs are pushing capital away from gold and into more yield-generating assets. The oil shock is also altering rate-cut expectations, making bonds more attractive than gold.

Why Is Gold Falling Despite the War?

Higher energy prices are currently putting pressure on gold prices. Although the war in West Asia has intensified, gold prices have not responded as they historically do in such scenarios. Instead, macroeconomic factors like interest rates and the U.S. dollar dominate short-term price movements.

The current oil shock has raised inflation expectations, forcing central banks to reconsider rate-cut plans. This hawkish shift reduces the appeal of gold, a non-yielding asset. The strengthening U.S. dollar also reduces gold's attractiveness to non-U.S. buyers, further exacerbating the downward trend.

What Are Analysts Watching Next?

Market participants are closely watching real yields and the path of the U.S. dollar. A higher-for-longer rate environment is a headwind for gold. If the geopolitical situation persists beyond two weeks, oil prices could rise significantly, further tightening monetary policy expectations.

Central bank interventions in the foreign exchange and commodities markets are also under scrutiny. For example, the Reserve Bank of India is actively intervening to stabilize the rupee amid external pressures. These interventions could indirectly influence gold demand and prices.

A potential stagflationary environment—where inflation remains high and growth slows— could provide longer-term support for gold. However, any positive effects may be limited if central banks aggressively raise rates to control inflation. Analysts like Christian Mueller-Glissmann from Goldman Sachs suggest gold could gain support in such a scenario.

Technical indicators reinforce a bearish outlook, with gold entering a descending channel. A recovery above $4,960 could reverse this trend, but momentum currently favors sellers.