The war in Iran has rewritten the inflation hedge playbook.
Since 27 February, the day before Operation Epic Fury began, Brent crude has surged 37%, while gold has fallen 10%.
The two assets investors have traditionally paired to protect against inflation and geopolitical shocks are now moving sharply in opposite directions.
Oil’s rally is relatively easy to explain. According to Goldman Sachs, around 14.5 million barrels a day of Persian Gulf crude production has been taken offline, pushing global oil inventories into a record drawdown of 11 to 12 million barrels a day in April.
Oil’s economics are straightforward. When supply collapses, prices rise until demand adjusts. Brent has climbed from $70 to around $100 a barrel, after peaking at $126.
Gold’s behaviour is more complex to explain.
The precious metal surged 65% in 2025. It was bought heavily by central banks for three consecutive years, and was widely seen by strategists as the ultimate protection against war.
Yet it has lost around a tenth of its value just as the conflict it was meant to shield against has erupted.
Why gold stopped working: The rate mechanism
Gold pays no coupon, no dividend, no interest. That single feature is the entire story.
The metal’s investment value is driven by the opportunity cost of owning it, and that opportunity cost is set by the level of real interest rates in the United States.
When yields rise, an investor giving up a 4% Treasury return to hold a brick of metal that yields zero is losing ground every day. When yields fall, that same brick becomes attractive because the alternative — fixed income — is paying less.
This is why gold rallied in 2025. Markets were pricing two or three Federal Reserve rate cuts by the end of 2026, real yields were drifting lower, and bullion had a clean tailwind.
The war in Iran has destroyed that tailwind in the past ten weeks.
The CME FedWatch tool now shows zero cuts for the entire year as the dominant scenario.
Notably, a year out, market-implied odds of a Fed hike now exceed those of a cut — suggesting that the next policy move, if any, is more likely to be an increase than a reduction.
Gold has repriced these shifting expectations in real time.
The metal has fallen from $5,275 per ounce on 27 February to $4,735 — a $540 drop over the past ten weeks.
“With the conflict triggering an energy supply shock that has reduced hopes for lower US interest rates, it is not surprising that gold has struggled to work as a safe haven this time,” said Amy Gower, Metals & Mining Commodity Strategist at Morgan Stanley.
Morgan Stanley’s framing matters because it identifies the regime shift directly. Gower argued that gold’s sensitivity to monetary policy has overtaken its safe-haven status as the dominant price driver, reducing its effectiveness as a hedge against both geopolitical risk and inflation.
The metal does not respond to events, she noted — it responds to the policy reaction that follows them.
The transmission is mechanical: higher-for-longer interest rates raise the opportunity cost of holding gold.
Gold’s real haven function is not what you think
Here is the part of the story that the textbook never quite gets right.
Gold does not hedge inflation. It hedges against the failure of the institution charged with controlling inflation.
When prices start rising from low or moderate levels — the kind of move that takes US headline CPI from 2% to 3.3% — gold tends to suffer. Markets do not see runaway risk.
They see a Fed with the tools, the credibility, and the political cover to either hike rates or keep policy restrictive for longer.
That expectation alone is enough to push real yields up and compress demand for a non-yielding asset. The 2026 episode fits this pattern almost perfectly.
Inflation is uncomfortable, but the central bank is still trusted to handle it, and gold is paying the price for that trust.
Gold’s real moment arrives when that confidence breaks: when inflation becomes unanchored, when the central bank is seen as unwilling or unable to stop it, and when investors start to question whether the currency itself will preserve purchasing power — that is when the metal shows its full defensive power.
The 1970s under Arthur Burns, the early stages of the eurozone debt crisis, and the 2020 pandemic, when fiscal and monetary expansion ran in tandem — those were credibility shocks, not inflation shocks.
Gold rallied in each case because the alternative being repudiated was the currency.
The Iran war has not produced a credibility shock. It has produced a supply shock that the Fed is widely expected to absorb by holding policy restrictive.
That distinction explains why bullion is down 10% during the war in Iran.
Goldman remains bullish on gold, but cautious on Hormuz
Goldman Sachs’ commodity team, led by Daan Struyven, continues to forecast gold reaching $5,400 per ounce by the end of 2026, anchored by continued central bank buying as countries diversify their reserves away from the US dollar, and by expectations that the Fed will eventually start cutting interest rates again.
Around 70% of central banks surveyed at Goldman’s recent central bank conference expect global gold reserves to rise over the next 12 months, and roughly the same share expect prices to settle above $5,000 within a year.
But Goldman warns that near-term risks point to weaker gold prices. Gold remains vulnerable to further selling pressure if disruption in the Strait of Hormuz persists.
The bank has upgraded its fourth-quarter 2026 Brent forecast to $90 a barrel, from $80, and warns that an adverse scenario could push prices above $100 a barrel if flows through the Strait of Hormuz do not normalise by the end of July.
What this means for investors seeking inflation hedges
An oil shock that cuts supply and lifts crude prices puts direct upward pressure on inflation.
Crude is the only inflation hedge that benefits from the very source of the inflation itself. Investors who bought oil during the war captured the inflation at its source.
The textbook says gold also hedges against inflation. The reality is more complex.
In the early stages of rising prices, gold often falls as central banks raise interest rates or keep borrowing costs high, making gold less attractive to investors. Its moment arrives only later, if inflation becomes severe enough to undermine confidence in the central bank’s ability to control prices.
In more normal conditions, gold tends to rise when interest rates fall, not when they rise.
The day the Strait of Hormuz reopens, oil prices will fall, and the Fed will regain room to cut rates. Gold’s pattern is likely to reverse once again. Until then, the war that was supposed to make gold shine has done the opposite.
Euronews
