Beyond the headlines: Why has gold underperformed despite Middle East turmoil
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I cannot remember how many clients have asked me why spot gold (XAU/USD) prices were underperforming during the Middle East conflict. On the face of it, given gold’s long-standing acceptance as a go-to safe-haven asset amid heightened uncertainty, price action has been counterintuitive, and questioning it is perfectly reasonable.
Against the US dollar (USD), gold surged above US$5,400 per ounce on 2 March, following the joint US-Israel action against Iran on 28 February 2026. The upside move was expected, given the yellow metal's historical status as a haven, which tends to underpin the asset during geopolitical uncertainty.
By the end of March, the precious metal lost nearly 12% to settle at US$4,667, recording its worst month since 2008. The conflict triggered secondary economic forces that overpowered the geopolitical premium on gold’s price, a shift driven by several simultaneous factors.
Historic rally: Overbought conditions
To understand why gold fell, it is important to acknowledge where we are coming from. As shown in the line chart, 2025 witnessed a record-setting rally, advancing nearly 70%; this was followed by a near-30% advance in 2024 and a 13% advance in 2023.
The 2025 rally was largely driven by central bank buying, expected Federal Reserve (Fed) easing, and geopolitical tensions. To say it was a good year for trend-following is an understatement. The rally drew a huge volume of speculative capital and, by most measures, was considered extremely overbought and technically crowded. This means that almost everyone who wanted to enter long had already bought.
The usual behaviour in times of geopolitical uncertainty and high volatility should have sent gold prices higher, and it did at the beginning of the war for one day! However, who was actually behind that move? This likely consisted of smaller investors and algorithmic systems responding to the news.
It is important to understand that the larger institutional investors who were already long provided a good level to unwind some of their long exposure and take partial profits. However, the pullback was expected to be a temporary, short-term move, as the underlying structural drivers remained largely in place, including central bank buying.
Increased interest rates
Heading into 2026, markets and economists expected the Fed to lower the funds target rate at least twice. However, the onset of the war ignited inflationary fears as energy costs surged, and by 9 March – with the Strait of Hormuz largely closed – Brent Crude oil reached a high of US$119.50 per barrel, thereby increasing input costs for businesses across all sectors.
The result was investors pulling back on their rate-cut bets and, at one stage, expecting rate hikes, ultimately sending US Treasury yields higher – as well as real yields, which are nominal yields minus inflation. This situation reinforced the Fed’s decision to keep the target rate on hold at 3.50-3.75% in January and March, following the central bank cutting rates at three consecutive meetings at the tail end of 2025.
It is important to acknowledge that gold is a non-yielding asset. Consequently, when yields rise, the opportunity cost of holding gold increases, which can weigh on demand. This dynamic highlights the fundamental tension in gold’s role as a haven, given its deep sensitivity to real yields. As such, when conflict increases inflation expectations, which reduces the possibility of the Fed easing (and increases the likelihood of a hawkish stance), this can prove to be a notable headwind for the yellow metal.
Safe-haven USD demand
Per the USD index – the value of the USD versus six international currencies – the greenback added 2.3% in March, reaching a 10-month high of 100.64, and extending February’s modest 0.5% appreciation. One of the primary drivers behind this strength was geopolitical safe-haven demand. Following the US and Israel's strikes on Iran, investors shifted into safer assets, which clearly favoured the USD's liquidity. Another driver was a hawkish shift in Fed expectations after investors unwound rate-cut bets.
An increase in the USD makes gold more expensive for international buyers, which ultimately weighed on the metal. I find it particularly important to appreciate this. Gold is priced in USD globally, so when the greenback strengthens, the purchasing power of foreign buyers is essentially reduced. The result can weigh on gold prices.
What makes this particularly interesting is that geopolitical uncertainty tends to attract safe-haven flows across both gold and the USD, despite their inverse correlation. However, USD demand can become sufficiently forceful and work against gold, which I believe was one of the headwinds for the metal.
Liquidity-driven selling
A less talked-about point – but a meaningful force nonetheless – is the broad sell-off across risk assets like Bitcoin in March, which led to global equities dipping lower. The risk-off environment, triggered by fears of a wider regional conflict and a demand-destroying oil shock, forced leveraged investors to face margin calls. And when investors are forced to raise cash, they tend to liquidate and unwind their most profitable positions: undoubtedly, this would have included gold, in light of the run higher over the past three years.
This mechanical selling has little to do with gold's fundamental value, specific price movements, or even investors' long-term views of the metal. It is simply a function of portfolio stress management and asset allocation. I believe this dynamic amplified the downward move considerably at the tail end of March, especially.
Sentiment and positioning
Looking at the Commodity Futures Trading Commission positioning data, net speculative long positions in gold futures peaked in late February – shortly before the conflict began – and then declined materially throughout March. This corroborates the narrative that the market was simply too long heading into the event. When geopolitical risk events occur in crowded positioning, the initial pop is frequently followed by a more sustained unwind as the marginal buyer disappears.
This is a dynamic I have observed repeatedly across commodity markets: the move that everyone anticipates rarely delivers the sustained trend that consensus expects, precisely because that consensus is already reflected in positioning. The conflict was, paradoxically, well-flagged enough in regional intelligence and defence circles that significant gold buying had already taken place in the weeks prior, leaving little residual demand to drive further upside once the event materialised.
What this means going forward
I want to be clear that I do not view March's decline as a structural breakdown in gold's long-term trend. The underlying pillars that drove the 2023–2025 run higher remain intact: central bank diversification away from the USD continues at pace, long-run real rates in a structurally higher-inflation environment remain a tailwind, and de-dollarisation trends among emerging market economies have not reversed.
However, one could say that this serves as a reminder that gold is not a linear safe-haven trade and often interacts with competing forces in unexpected ways. My base case remains that once the Middle East tensions de-escalate or markets reach a new equilibrium on oil and Fed monetary policy, gold should find renewed support.
Written by FP Markets Chief Market Analyst Aaron Hill
