Summary: Markets have adopted a risk-off posture as the Iran conflict continues, producing outsized swings in the price of gold. While bullion retains its long-term role as a hedge and store of value, in the near term higher energy-driven inflation expectations, reduced odds of policy easing, and forced selling have combined to drive significant volatility.
Acute volatility in the gold market is expected to remain in the coming weeks as investors retreat from risk amid the ongoing Iran conflict, analysts said. The episode has amplified inflation worries, trimmed down bets on near-term interest rate cuts and clouded the outlook for global growth - forces that have pressured bullion despite its traditional safe-haven status.
With the Iran conflict now in its fourth week, spot gold has tumbled 15% since hostilities began on February 28 and stands about 22% below the record set in January. The metal's sensitivity to interest-rate expectations is central to the current dynamic: higher probability that rates will remain elevated for longer, driven by a jump in energy prices, weakens demand for an asset that does not yield interest.
"Gold should do well in a stagflationary environment, it always has, but there may be more profit taking and liquidation first," said John Reade, senior market strategist at the World Gold Council. He added that many positions established for 2025 are being unwound, and that 2026 stagflationary trades have yet to materialize.
Analysts at ANZ pointed to a familiar pattern in episodes of sudden geopolitical shock: an initial spike in safe-haven demand can quickly be offset by liquidity needs, prompting selling. That same sequence was observed when Russia invaded Ukraine in February 2022, when an initial gold price rise later gave way as the inflation shock fed through to higher rates.
The scale of the market's recent ascent underlines how deep short-term corrections can be. Gold rallied from $1,650 per ounce in November 2022 to a record $5,595 in January 2026, a run fuelled first by central bank and institutional buying and more recently by speculative retail demand, particularly in Asia.
"The bigger picture remains intact: ballooning G7 budget deficits, sticky inflation and central bank foreign reserve diversification amid sustained deglobalisation," said John Meyer of SP Angel, highlighting structural drivers that underpinned the earlier rally even as short-term flows have turned.
On the demand side, gold-backed exchange-traded funds have registered notable outflows since the Middle East conflict began. According to World Gold Council data, ETFs have seen $7.9 billion in withdrawals, equivalent to 54.8 metric tons, mainly from U.S. funds, bringing total holdings to 4,117.9 tons.
Price action reflected the pressure on physical and paper markets: gold reached a four-month low of $4,098 in early trading on Monday as Chinese equities - a key source of demand for the metal - dropped by their largest margin in a year. Spot gold later trimmed losses and was last down 2.5% at $4,377 an ounce after U.S. President Donald Trump said he would delay any strikes on Iran's energy infrastructure.
Analysts say the near-term story will likely be governed by liquidity and positioning, while long-term fundamentals that support gold as a store of wealth remain in place. Until the market digests portfolio adjustments and the implications for inflation and policy become clearer, price swings are likely to remain elevated.
Key points
- Geopolitical shock from the Iran conflict has driven a sustained risk-off stance, heightening gold price volatility.
- Rising energy prices have increased expectations that interest rates will stay higher for longer, a headwind for non-yielding bullion.
- Gold-backed ETFs have seen $7.9 billion (54.8 metric tons) of outflows mainly from U.S. funds, reducing holdings to 4,117.9 tons.
Risks and uncertainties
- Continued liquidity-driven selling could exacerbate price declines even if safe-haven demand exists - impacting commodity markets and ETF investors.
- Higher energy-driven inflation that sustains expectations of elevated rates could weigh on non-yielding assets such as gold, affecting portfolio allocation decisions across fixed income and commodities.
- Volatility in major equity markets, particularly in China where retail demand is important, may further influence gold flows and prices.