- Iran war triggers sharp gold sell-off, defying safe-haven role
- Sell-off partly liquidity driven to meet margin calls amid risk-off conditions
- Futures positioning and ETF outflows suggest profit-taking rather than structural bearishness
- Rising energy prices from Middle East disruptions weigh on gold
- Near-term volatility is expected but long-term bullish case for gold remains
An atypical response to geopolitical risk. Gold has not reacted to the US-Iran war as it typically would in other conflicts. The expectation was for increased hedging demand and more durable risk premiums for gold, but the opposite has unfolded; aside from a momentary spike in the immediate aftermath of the opening strikes, gold has been on a sharp downward trajectory. As at 24 Mar, gold is hovering just above the USD4,300/oz. mark, and is roughly flat on a YTD basis. So why has gold made such unprecedented moves (again) and defied its role as a traditional safe haven amid the chaos of war? The short answer is inflation; markets are pricing in the probability of a protracted conflict, higher-for-longer energy prices, and eventually higher inflation and rates. The immediate selling pressure that we are witnessing is also liquidity-related to some extent, where gold is being used as a funding source for margin calls as the war continues to drive a volatile risk-off market. In short, there are both technical as well as fundamental factors that are worth noting for this sell-off.
Correlations lining up suggest liquidity-driven selling. Several datapoints suggest the current sell-off is at least partially liquidity-driven. Firstly, gold is falling in tandem with other asset classes, including equities, bonds, and even cryptocurrencies. The sharp moves amid a broad risk-off market environment suggest gold is being used as a funding source to meet margin calls for other assets. We compared the correlation between gold and other major asset classes pre-war and post-war and found that gold became significantly more correlated with all other major asset classes, sans crude oil, in the latter period. This is a sign of liquidity-driven selling and is similar to what happened during the Covid-19 pandemic, when gold dropped c.12.5% despite massive uncertainty due to funding needs elsewhere.
Futures positioning and ETF flows suggest the same. Futures positioning on Comex also suggests a technical element to the current sell-off. Open interest in gold futures remains close to its February low of c.400 contracts (coincidentally an eight-year low), which suggests that there has been no significant short-position building since the end-January/early-February sell-off and, therefore, no fundamental signs of bearishness. Taken in conjunction with ETF flows, which have seen sharp declines since the start of the war, we can infer that much of the current sell-off is likely driven by profit-taking and liquidity creation.
The war has shifted the inflation outlook. Technical factors aside, there have been shifts in gold fundamentals, particularly around inflation. The blockade of the Strait of Hormuz and damage to oil and gas infrastructure in the Middle East have materially raised energy price projections and inflation risk. Consequently, the dollar and rates have surged. Since the start of the conflict, the US 10Y Treasury yield and the inflation-indexed 10Y government bond yield have risen by 21.3% and 12.4%, respectively. The trade-weighted dollar index has also increased by 2.5% over the same period. In addition, markets are now pricing in the probability of a Fed rate hike, rather than the two cuts previously expected by the end of the year. Whether or not this new inflation picture ultimately materialises will depend very much on how the war progresses from here.
Expect volatility to remain elevated in the short term. Trump’s latest announcement of a five-day postponement of planned military strikes against Iranian energy infrastructure gives some hope of de-escalation, but the reality on the ground in the Middle East remains fraught with uncertainty. The DBS base case assumes a four- to six-week conflict followed by gradual normalisation. Under this scenario, oil prices should eventually moderate to USD75-80/bbl post-resolution, and the impact on inflation should be kept under control. However, the spectre of a longer-than-expected conflict is not fully behind us and any breakdown in purported talks would likely send oil prices above USD110/bbl, putting short-term selling pressure on gold once again. As such, expect volatility to remain elevated for both oil and gold prices in the near term, as headlines continue to drive big moves.
Long term outlook remains intact. While selling pressure on gold could remain strong in the near term in response to oil price spikes and equity market corrections, we expect gold to rebound eventually, similar to past major market corrections (e.g. Dot-com, GFC, Covid-19 pandemic, and Liberation Day). We also expect it to continue outperforming over the long term given that its long-term drivers remain intact. Global monetary debasement risk is alive and well, exacerbated by war and conflict, which will continue to drive incremental government spending. Persistent and elevated levels of geopolitical uncertainty should also continue to push long-term de-dollarisation and dollar-hedging narratives to the fore for investors and keep gold well-bid as a portfolio risk diversifier. Additionally, new gold deposit discoveries have waned significantly in recent years, which gives the precious metal a very favourable supply-demand balance in the long term.
What should investors do in such an environment? In our previous article ("Gold: Looking Past the Volatility", published 19 Feb 2026), we highlighted how a heightened volatility market underscores additional consideration for gold investors, such as being more judicious with the use of leverage and hedging existing exposures with puts. The Iran war has since kicked volatility up a notch and made these considerations even more important. For now, we keep our target prices unchanged (1H26: USD5,300/oz.; 2H26: USD6,250/oz.; 2030: USD8,060/oz.) which means that there is meaningful upside from current levels. Investors who do not yet have exposure to gold, or who wish to increase their allocation, can capitalise on the prevailing volatility to buy on dips.
Figure 1: Gold continues its roller coaster ride in 2026
Source: Bloomberg, DBS
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