Gold crashes to four month low then surges $400 in hours 

Yesterday’s gold session will be remembered as one of the most dramatic in the precious metal's recent history.

In early Asian and European trading, spot gold plunged more than 8% to a session low of $4,098, its weakest level in four months and briefly negative for the year. That wipeout came just weeks after gold was trading above $5,400, meaning the metal shed nearly a third of its value from peak to trough in the space of a few weeks.

The SPDR Gold Trust, one of the world's largest physically-backed gold exchange-traded funds, fell to $399.21 in premarket trading, briefly dipping below the psychologically significant $400 mark. The broader precious metals complex crumbled with it. Silver plunged 12.4% to $61 per ounce at its low, representing a fall of almost exactly 50% from its record peak of $121 reached at end-January. Platinum futures dropped nearly 10%, and palladium shed close to 5%.

The immediate trigger was a statement from Iran's Deputy Foreign Minister Kazem Gharibabadi, who warned on Sunday that any attacks on the country's critical infrastructure would be met with ‘proportionate reciprocal action.’ That statement came in response to an ultimatum issued by President Trump demanding the reopening of the Strait of Hormuz, the vital chokepoint through which roughly a fifth of the world's oil supply passes, by late Monday or face military consequences.

Then, mid-morning London time, everything reversed.

Trump posted on his Truth Social platform claiming that the US and Iran had held ‘in-depth, detailed and constructive conversations’ over the previous two days, and announced that strikes on Iranian power plants and energy infrastructure would be postponed for five days pending continued dialogue.

Markets reacted as one might expect; gold bounced within $10 of the $4,500 level, silver erased its entire intraday loss, while the S&P 500 popped 1.4% and Brent Crude fell more than 8%.

Iran's response was unequivocal: the country's Fars news agency cited a government source saying there had been no direct or indirect communications with the United States, through any intermediaries. But whether or not diplomacy is genuinely underway, traders appear to be increasingly pricing in the possibility of de-escalation.

By mid-afternoon in London, spot gold was trading at approximately $4,470, still down on the day but having recovered the vast majority of its daily losses. 

Why war is hurting gold, not helping it

The instinctive assumption most investors carry is that war is good for gold. Uncertainty rises, confidence in paper assets falls, and money flows into what is considered to be a key long-term store of value.

That is what happened in the immediate aftermath of the US-Israeli strikes on Iran on February 28, where gold surged above $5,400 within days of the conflict beginning. But since that initial spike, gold has fallen roughly by 25%.

The pattern is not unprecedented as it mirrors the asset’s behaviour following Russia's invasion of Ukraine in 2022 and other previous Middle East conflicts, where an initial safe-haven surge gave way to a more complex set of macro forces.

What seems different this time is the severity and speed of the reversal.

The core dynamic is what some analysts have called the ‘oil-shock paradox’ in gold markets. The war has sent oil prices surging, at one point more than 36% above their pre-war level, and that energy shock has been read by markets not as a geopolitical crisis to hide from, but as an inflationary shock to position against. Higher inflation means central banks, and particularly the US Federal Reserve, are less likely to cut rates.

And higher-for-longer rates are gold's enemy.

The reason is straightforward: gold pays no yield. When interest rates are low or falling, the cost of holding a non-yielding asset is modest. When real yields (nominal yields adjusted for inflation expectations) rise, every dollar sitting in gold is a dollar forgoing the increasingly attractive returns available in cash or government bonds. In that environment, gold becomes relatively less appealing even as its theoretical inflation-hedging properties remain intact.

The numbers illustrate how dramatically rate expectations have shifted. On the eve of the war on February 27, markets were pricing in US rate cuts as a near certainty, at a 96% probability, according to Fed Funds futures. By Monday, that had collapsed to barely a 10% chance of any cut before the end of 2026. The Fed's own updated dot plot projections, published last Wednesday, continued to reflect no imminent move on rates.

At the same time, the US Dollar has strengthened. And because gold is priced in dollars, a stronger greenback makes it more expensive for buyers outside the United States, compressing global demand. The dollar's strength in this instance reflects both its traditional safe-haven role and the US's position as a net energy exporter, meaning American exporters benefit from higher oil prices in a way that most other economies do not.

The result is that gold is being squeezed from multiple directions simultaneously: higher real yields, a stronger dollar and the repricing of monetary policy all pointing the same way. 

Who is actually selling and why?

Understanding the sell-off also requires understanding some of the less obvious mechanics of modern gold markets, specifically the role of leveraged positioning, liquidity demands and ETF flows.

Gold entered the current crisis on the back of an extraordinary rally. The metal rose by more than 60% in 2025, driven by a structural erosion of trust in monetary policy and fiscal discipline, persistent central bank buying and concerns about US political stability. That strong run had two consequences.

First, it left gold's valuation stretched relative to the macro fundamentals that typically anchor it. Second, it meant a large number of investors, including leveraged funds, held significant long positions built during the rally.

When those positions come under stress, gold gets sold, not because anyone has changed their fundamental view on the metal's value, but because it is one of the most liquid assets in the world.

In times of acute market stress, liquid assets are sold to raise cash, meet margin calls on positions elsewhere, or reduce portfolio risk. In simple terms, liquid assets including gold get sold because illiquid positions simply can’t be sold at all.

ETF flows are also a key indicator. The SPDR Gold Trust and the iShares IAU fund (the two largest physically-backed gold ETFs listed in the United States) shrank by 4% and 4.4% respectively since the conflict began, together liquidating 66.3 tonnes of bullion this month. That is the largest tonnage decline since March 2021, and puts these funds on course for their first net monthly outflow since May 2025. Silver's equivalent ETF, the iShares SLV, shrank by 4.7% over the same period.

There is also a geopolitical element to some of the selling that goes beyond simple liquidity management. Some analysts have pointed to the possibility that central banks and Gulf state sovereign wealth funds, which had been among the most consistent buyers of gold over the past two years, may now be sellers, tapping reserves for capital preservation rather than accumulation.

Taken together, the message from market mechanics is that gold's decline is not a judgment on its long-term role, but a product of a specific set of short-term forces: crowded positioning, leveraged unwinds, ETF outflows and liquidity demands colliding with an unfavourable macro backdrop of rising yields and a stronger dollar.

What next for the gold price?

From Monday's lows near $4,100, gold has found support at a technically significant level — its 200-day simple moving average, which sits at approximately $4,092. The swift bounce from that level, even before Trump's announcement provided a catalyst, suggests the market retains sufficient buyers to defend it.

As long as price remains above that average, the longer-term bull trend technically remains intact, and what has unfolded since January could be interpreted as a corrective pullback but not the end of the bull market.

The question is what comes next, and this depends heavily on the resolution (or escalation) of four interrelated variables: the trajectory of real yields, the strength of the US dollar, the scale and duration of the energy shock and asset flows into or out of gold-backed instruments.

Gold’s recovery may take time. If the Iran conflict is genuinely de-escalating, one of the key geopolitical supports for gold weakens, and if the inflationary consequences of the oil shock persist regardless, the macro headwinds remain.

The more constructive case rests on the expectation that the current configuration of high real yields, a stronger dollar and suppressed rate cut expectations will eventually shift. If inflation pressures ease, or if economic weakness forces the Fed's hand on rates, gold's relative attractiveness could improve sharply.

Falling yields and dollar weakness are historically among the most powerful tailwinds for bullion. A policy pivot, a worsening of the conflict or evidence that stagflation is taking hold could all serve as catalysts.

Longer term, the structural thesis that drove gold's 65% rally last year remains largely intact. Central banks continue to buy, geopolitical fragmentation shows no signs of reversing and debt levels in the major global economies remain elevated. Perhaps most importantly, the de-dollarisation trend that has motivated gold reserve accumulation among non-Western central banks has not been unwound. These are multi-year forces, not quarterly ones.

The major investment banks reflect this in their targets. UBS holds a $6,200 per ounce forecast for September 2026. Deutsche Bank has reiterated $6,000 per ounce. Société Générale also targets $6,000 by year-end. Each of those targets implies a recovery of 35% or more from Monday's intraday lows, consistent with the scale of the swings already seen this year.

As ever, gold is perhaps best viewed as a portfolio diversifier and inflationary hedge. Its role has long been to cushion drawdowns, hedge against fiscal and monetary stress and provide resilience in scenarios where bonds and equities fall simultaneously. Monday's session, as alarming as it was, does not change that underlying logic.

Of course, past performance is no guarantee of future results.