Gold loses appeal after Iran conflict

Investors typically expect their holdings to generate returns through mechanisms such as bond coupons or stock dividends. Gold is different: it does not produce cash flow, and practical uses like jewelry or electronics are generally not sufficient to justify large allocations in many portfolios.

For much of its appeal, gold has functioned primarily as “insurance” against shocks—whether those shocks are real or symbolic. The rationale is rooted in its long history of holding value and its tendency to rise when other assets face stress.

Gold’s performance after the Iran conflict

The energy shock associated with the US–Israel–Iran conflict was widely viewed as a potential catalyst for gold. However, the metal has not delivered. Since the Iran war began on February 28, gold prices have fallen by about 15 percent, a decline that has been worse than global stock markets. In this sense, the hedge has disappointed.

Why gold has come under pressure

One key factor is the relationship between gold and real yields on inflation-linked bonds. Gold does not pay interest, but it is often treated as a store of nominal value similar to inflation-linked instruments. When real yields rise, gold becomes less attractive because it offers no yield of its own.

Real yields increased sharply after the United States and Israel began strikes against Iran. The 10-year US Treasury yield rose by 0.3 percentage point. This move reflects a deterioration in global risk appetite and concern that higher oil prices could push inflation higher, prompting central banks to raise rates.

Central bank selling and reserve management

Another explanation involves central bank behavior. In countries concerned about Western sanctions—such as Russia, whose foreign reserves were frozen after the Ukraine conflict—gold can serve as a hedge against the weaponization of the dollar. In other places, gold also supports reserve diversification.

At the same time, gold’s strong run in recent years has made profit-taking more appealing. The article cites examples including Turkey, which sold $8 billion of gold in the two weeks to March 20 to support the lira. It also notes that India may be doing something similar. Separately, the Polish central bank governor recently considered locking in some gains to fund defense spending. Such sales can help explain the recent decline.

Speculation and positioning in gold ETFs

Even with higher real yields and central bank selling, the article says these factors do not fully account for gold’s move. It argues that gold is increasingly behaving like an asset that can be driven by sentiment and positioning.

It points to a period when gold’s rise coincided with growing speculative interest. A roughly 60 percent increase from last summer to the end of February paralleled a surge in gold exchange-traded funds (ETFs). Gold ETF holdings rose by 25 percent over the past year to about 4,200 tonnes. The current decline is described as being partly accelerated by the unwinding of these speculative positions.

What gold is still seen to protect against

The article concludes that gold has not been a comprehensive hedge in all conditions. Historically, its main allure has been less about shielding against specific energy or geopolitical shocks and more about protecting against currency depreciation risk—particularly in a world where rising debt can lead governments to seek ways to erode real debt burdens through inflation.

By Vu Hao