The United States Central Command announced that on the 11th, U.S. forces conducted strikes against Iran, completing the third such operation this week, targeting approximately 140 Iranian military objectives. Iran responded with a series of attacks on U.S. interests in the Middle East. The Islamic Revolutionary Guard Corps Navy declared the Strait of Hormuz closed as of the 12th, until further notice and until the U.S. ceases its interference in the region.
International oil prices surged in response. On July 13, WTI crude oil futures saw gains briefly widen to 5% in the afternoon. However, the traditional safe-haven asset, gold, experienced a sharp sell-off. Spot gold fell to a low of $4,043 per ounce, with a single-day drop of up to $58, breaching the $4,100 level.
Gold's Price Action
The conventional wisdom that "war drums sound, gold prices soar" has once again proven unreliable. Back in early March, when hostilities between the U.S. and Iran first escalated, gold prices also experienced a significant drop. Why does gold fall deeper into geopolitical crisis? The answer lies within a counterintuitive transmission chain.
Three-Stage Transmission: How Oil Prices Become a Constraint on Gold
The immediate catalyst for this gold plunge is precisely the oil price surge triggered by the U.S.-Iran conflict. This transmission logic unfolds in three steps.
First, it pushes up real interest rates. The Strait of Hormuz handles roughly one-third of global seaborne oil trade. Its closure sharply increases energy inflation pressure. Markets begin pricing in the possibility of the Federal Reserve being forced to raise interest rates to combat inflation. CME's FedWatch Tool shows that after the U.S.-Iran conflict intensified, the market-implied probability of the Fed holding rates steady in July fell to 64%, while the probability of a 25-basis-point hike rose to 35%. Gold is a non-yielding asset; higher benchmark rates increase the opportunity cost of holding it, naturally putting pressure on its valuation.
Second, it strengthens the U.S. dollar. Gold and the dollar often have an inverse relationship. Rate hike expectations boost the U.S. Dollar Index. Since gold is priced in dollars, a stronger dollar makes gold relatively more expensive for overseas buyers, directly suppressing demand.
Third, it increases holding costs. Once the logic chain of oil prices → inflation → rate hike expectations is established, the appeal of gold as a non-yielding asset diminishes. Capital then flows toward higher-yielding assets like U.S. Treasuries and money market funds. Persistent outflows from gold ETFs further exacerbate selling pressure.
In simple terms: U.S.-Iran conflict → oil prices surge → inflation fears prompt rate hike expectations → dollar strengthens, rates rise → gold falls. Safe-haven sentiment has lost out to rate hike fears, which is the core contradiction in the current gold market.
The Warsh-Era Fed: Markets Lose Their "Anchor"
If oil prices are the trigger, then the policy shift under new Fed Chair Kevin Warsh is the "institutional backdrop" causing gold to fall even deeper.
Warsh, a disciple of Milton Friedman's monetarism, has reshaped the Fed with three key reforms since taking office.
First, ending forward guidance. At the ECB Forum on July 1, Warsh clearly announced that the Fed would no longer pre-signal its rate path to markets, relying entirely on the latest economic data for "meeting-by-meeting decisions." Policy statements were drastically shortened from over 300 words to about 130, removing all hints about future rate adjustments.
Second, avoiding the dot plot. Warsh personally refuses to submit rate forecasts, stating the "dot plot is drawn in pencil and can be erased," arguing that the Chair's personal predictions are unhelpful for policy execution.
Third, emphasizing central bank independence. Facing pressure from the President to cut rates further, Warsh publicly responded: "The Fed has long been independent and will remain so; you won't see any change."
Over the past decade, markets grew accustomed to "Fed dependency"—when in doubt, bet on central bank support. With Warsh closing this window of expectation, investors have lost the "clear guide" on policy path and must now closely watch every inflation data point to make their own bets. The uncertainty premium has risen, making any market disturbance more likely to trigger stampede-like selling. Gold is a typical victim of this new paradigm.
Technical and Fund Flows: How Far to a Rebound?
Technically, the gold price decline is approaching the $4,000 psychological level, touching its yearly low. Research calculates that the current price near $4,000 already fully prices in 3-4 rate hikes, exceeding the tightening expectations actually priced into interest rate futures markets, indicating significant "over-pricing."
Regarding fund flows, previously overweight positions in the gold market have been sufficiently adjusted. As of June 26, the SPDR Gold ETF saw consecutive days of outflows, with its holdings slightly below the reasonable allocation level corresponding to a neutral rate environment.
What does this mean? In the short term, rate hike expectations have been fully, even excessively, priced in. If oil prices subsequently retreat or U.S. inflation data shows signs of moderation, short-covering could bring a temporary rebound opportunity. However, short-term bargain hunting requires caution, as the data-dependent mode under Warsh's reforms means any unexpectedly high inflation reading could trigger fresh selling pressure.
Long-Term Perspective: Has Gold's Fundamental Logic Changed?
While short-term dynamics are headwinds, the foundation for gold's long-term allocation remains intact.
First, the de-dollarization narrative persists. Following the freezing of Russia's foreign reserves in 2022, global central bank gold buying has become a structural force. In Q1 2026, the People's Bank of China accelerated its gold purchases for three consecutive months, with China's net gold imports reaching 317 tons, nearly triple the previous quarter. A World Gold Council survey shows 89% of responding central banks expect global gold reserves to continue increasing over the next year.
Second, while Warsh's reforms increase short-term uncertainty, in the long run, if the Fed returns to a "rules-based" rather than "discretionary" approach, a clearer macro pricing anchor might actually benefit gold's long-term value reassessment.
Third, historical experience shows that liquidity shocks induced by war often follow a pattern of "first fall, then rise"—after the 2008 financial crisis, the 2020 pandemic, and the 2022 Russia-Ukraine conflict outbreak, gold initially fell sharply before rebounding significantly. The current sell-off stems more from hedge fund de-leveraging and programmatic stop-losses rather than a systematic withdrawal by central banks or long-term allocation funds.
In summary, the short-term outlook hinges on interest rates, while the long-term view rests on trust in currency systems. In the near term, gold is suppressed by rate hike expectations, and with the Fed in the "Warsh fog," markets lack an anchor, making volatility inevitable. In the long term, the structural support from de-dollarization and global central bank buying remains unchanged. Once the current over-priced rate hike expectations are corrected, it may instead create opportunities for a rebound.
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