When the US and Israel started firing missiles at Iran, Alphaville was not shocked to see the gold price jump higher. As MainFT reported at the start of the war:
Gold raced close to a record high on Monday, jumping as much as 2.6 per cent to more than $5,400 a troy ounce, as drone strikes on Qatar’s natural gas facilities raised fears of a new energy crisis. It was later up 0.7 per cent on the day.
Lately, it’s been a different story.
But why?
Morgan Stanley’s commodities team put out a note last week looking at the shiny metal’s price decline. Yes, a week is a long time ago (the price is more than 10 per cent lower today). But let’s review for clues.
First up, they note gold pings around all over the place during risk events. Its price dropped 10 per cent in the week after the World Health Organization declared COVID-19 a pandemic, and 5 per cent after Trump announced he was erecting monster tariffs on so-called liberation day. Both times it recovered and went on to post gains. So maybe the c20 per cent price fall is just noise?
However:
While geopolitical risk can be supportive for gold, its performance in 2H 2022 shows us that this is not always the case, especially if it drives inflation and Fed rate hikes.
Oh yes — inflation and Fed hikes. Inflation expectations, as priced by bond-types, have risen. And while hikes aren’t priced for this year, all the cuts that used to be priced have been taken out.
Higher interest rates increase the opportunity cost of holding your wealth in a pet rock. Or, as MS put it:
if the Fed does end up on hold for longer or even hiking, history suggests ETFs, which are often the swing gold buyer/seller, could liquidate some of their gold holdings.
Regular readers will recall the old relationship between long-term real interest rates and gold. Lower rates => lower opportunity cost in storing your wealth in something that pays no cash flows => higher gold prices. Higher rates => higher opportunity cost => lower gold prices. It worked pretty well for years.
But ever since Russia invaded Ukraine, the chart has been useful mostly for losing anyone relying on it lots and lots of money.
In fact, conventional wisdom now puts the causation of the relationship breakdown with central banks shifting their reserves away from US dollars. After all, a lot of the world’s central bank reserves sit with authoritarian regimes who might not want to have their fightier instincts checked with financial sanctions.
And while Morgan Stanley notes that central banks are likely to continue buying, there are some caveats.
We’ve reported before, the actual official flows data doesn’t really support the story of accelerated central bank purchases, even if we can see some sovereign-controlled entities have been piling in.
Moreover, MS cites the governor of the National Bank of Poland — the largest central bank buyer of gold in 2025 — chatting about the possibility of liquidating gold reserves to monetise their revaluation gain of c$53bn to finance defence spending. So perhaps we’re going to get a bit more two-way risk on the central bank buying front. (Although Governor Glapiński has apparently rowed back on this plan since.)
The analysts point to other substantial investors — notably Tether, the offshore US dollar stablecoin issuer, which was the second-largest buyer of gold in 2025. Tether doesn’t publish its holdings on a super-frequent basis so we’re not sure how it’s been trading the metal. But we do know that the coin’s market cap has shrunk $3bn so far this year, after growing $47bn in 2025 and $49bn in 2024. So if Tether has kept its allocation steady in 2026, this won’t have helped the gold price.
Alphaville isn’t calling for the old relationship between gold and long-term real yields to re-couple. But if it did, the gold price would need to head a long long long way down from here.
Further reading:
— SOFAZ so good (FTAV)
— Tether, the gold whale (FTAV)
— Who’s been buying all the gold? (FTAV)
— Central banks have been buying a squillion tonnes of gold, promise (FTAV)
— Holding gold hasn’t worked. Buy gold. (FTAV)
— So you want to talk about gold (FTAV)
— Do central banks really have more gold than US Treasury bonds? (FTAV)
