from BullionStar:
By any historical intuition, gold should be flying. The United States and Iran spent the weekend of 18–19 July exchanging the heaviest strikes of a war now in its sixth month. Central banks are buying gold at a near-record pace, and, on World Gold Council figures, gold has by some measures overtaken US Treasuries as the world’s largest reserve asset. Yet the metal just posted its biggest weekly loss since June and spent the loudest weekend of the war going nowhere, defending US$4,000 after a fall of roughly 30 per cent from January’s record just short of US$5,600.
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If you find that confusing, you are in good company: “why isn’t gold rallying?” has become the most common question in gold commentary. The answer is not that gold is broken. It is that most observers are watching the wrong channel. Understanding the right one reveals something most investors overlook: there is not one gold market, but two, both sharing the same quoted price.
War Reaches Gold Through the Wrong Channel
The intuition says: conflict means fear, and fear means gold. But geopolitics does not act on gold directly. It acts through markets, and this conflict is reaching gold through a channel that works against it.
The chain runs like this. Strikes around the Strait of Hormuz push oil prices up, with Brent touching US$100 at the time of writing. Expensive energy feeds inflation, which reached 4.2 per cent year-on-year in May before June’s cooler 3.5 per cent reading, keeping inflation above the Federal Reserve’s 2 per cent target for a fifth consecutive year. Persistent inflation keeps the Fed leaning hawkish rather than cutting: at the time of writing, markets expect a hold at the 28–29 July meeting but price a strong chance of a hike by September. Higher rates lift bond yields, with the 10-year Treasury around 4.5 per cent, and higher yields raise the opportunity cost of holding an asset that pays no interest.
So, the war is bullish for gold in the textbook sense, but in practice it has firmed up the single force that matters most for gold’s short-term price: real interest rates, meaning bond yields after inflation. When real yields rise, gold falls, and no volume of frightening headlines reliably overrides that in the short term. This is not new. The same mechanism pushed gold down through the 2013 taper episode and turbocharged it in 2020 when rates went to zero. The correlation is a tendency, though, not a law: gold roughly doubled through 2024 and 2025 despite firmly positive real yields, as relentless central bank buying overwhelmed rate-driven selling.
Hold that thought, because it is a first glimpse of the two markets this article is about. The lesson is not that gold has stopped responding to danger. It is that over weeks and months, gold trades on the price of money. Only over years does it trade on the trustworthiness of money. And trust is precisely what has been draining away. When the West froze Russia’s central bank reserves and cut its banks out of the SWIFT payment system in 2022, every reserve manager in the world learned that Treasuries and dollar deposits can be switched off by someone else’s government. Gold in a vault at home cannot. A meaningful share of the central bank buying that has reshaped the gold market since then dates from exactly that lesson.
