I was reading GainspainsCapital’s latest piece on why gold sold off during the Iran war, and I think it explains one part of the story really well. It also got me thinking about what happens next.
When the war started, almost everyone expected gold to explode higher.
Instead, it dropped.
That confused a lot of people.
I think people were watching the wrong market.
The war sent oil higher.
Oil pushed inflation expectations higher.
The bond market immediately started pricing in fewer rate cuts and a higher chance the Fed stays tight even longer.
Treasury yields jumped.
The dollar got stronger.
Gold pays no yield.
That is why gold sold off.
It wasn’t because investors suddenly stopped believing in gold.
It was because the market decided inflation was becoming a bigger problem than geopolitical fear.
Gold has always done its best when real yields are falling.
This time the opposite happened.
Higher oil made investors think interest rates could stay higher for longer.
That changed the trade.
But here is the part I keep thinking about.
The market already made that adjustment.
Gold has already corrected sharply from its highs.
Meanwhile, the reasons people bought gold in the first place haven’t gone away.
Government debt is still exploding.
Central banks are still buying gold.
The Middle East is still unstable.
The fiscal picture hasn’t improved.
If anything, it has become worse.
The only thing that changed was the interest rate outlook.
If yields stop rising…
If inflation expectations stop getting worse…
Or if the Fed signals it is done tightening…
The biggest headwind against gold starts disappearing.
That doesn’t mean gold goes straight back to new highs.
But it does mean the reason it fell may already be running out of fuel.