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Gold has dropped more than 20% since its historic peak at the end of January, right in the middle of a conflict in the Middle East, with the Strait of Hormuz closed and oil trading at $120 per barrel. Is gold still a safe haven, why does it fall when the world is on fire? What is happening in the markets may seem counterintuitive, but it is not irrational.

First, the dollar has regained dominance. In times of crisis, there are two main safe havens: gold and the US dollar. At the moment, the dollar is winning. The dollar index has strengthened significantly since the beginning of the conflict. Because gold is priced in dollars, a stronger dollar makes gold more expensive for buyers using other currencies. This reduces demand and puts pressure on prices.

Second, interest rates are no longer falling. This may be the most decisive factor. The oil shock caused by the closure of the Strait of Hormuz is fueling inflation again. When inflation rises, central banks cannot lower rates. The Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan have all paused their monetary policies. Markets are no longer expecting rate cuts before mid-2027. For gold, which yields no income, this increases the opportunity cost of holding it.

Third, the “paper” gold market is undergoing a correction. Gold had risen more than 60% in a year, leading to massive speculative positions from hedge funds, systematic funds, and momentum investors. When volatility spikes, these positions reverse. Margin calls trigger forced selling. This is not a loss of conviction in gold, but a need to cover losses elsewhere.

Fourth, markets follow the classic pattern: buy the rumor, sell the news. Since 2022, gold has been heavily bought as protection against exactly this type of scenario—war in the Middle East, geopolitical instability, and supply risks. When the scenario materializes, the risk is already priced in, and early investors take profits.

Gold performs best during crises of monetary confidence, when the financial system itself is questioned. What we are experiencing today is an inflation shock driven by supply and energy. In such a scenario, capital flows first into oil and the dollar, not gold—at least for now.