An interesting phenomenon is unfolding in the gold market: amid a major conflict escalation at the Strait of Hormuz, gold prices have actually dropped to around $5,078 per troy ounce after touching an all-time high in the first week of the month. This contradicts the common perception that gold always rises during wartime.
The primary factor behind this decline is the sharp strengthening of the US Dollar. The DXY index surged as global liquidity demand increased for crude oil transactions with soaring prices. Since gold is denominated in dollars, a stronger dollar makes gold significantly more expensive for foreign currency holders, suppressing international demand.
Meanwhile, the crash in global stock markets due to war fears triggered gold selling by major financial institutions. This phenomenon is known as 'forced selling' — investors were compelled to liquidate their gold holdings to cover losses in risky asset portfolios or meet margin call obligations. This is a pattern also seen at the start of the COVID-19 pandemic in March 2020, when gold dropped sharply before ultimately staging a massive rally.
Anticipation of energy inflation also led markets to expect that central banks will maintain high interest rates for longer. This reduces gold's attractiveness as a non-yielding asset compared to government bonds or dollar deposits that now offer attractive yields.
Analysts view this movement as a consolidation phase and profit-taking after the massive rally earlier this year. For long-term gold investors, dips like this can actually present accumulation opportunities — with the caveat that you should always use a dollar-cost averaging strategy and never allocate your entire portfolio to a single asset.
