Gold Rose 67 Percent, Then Fell 26. The War Explains Only Half of It.

By The Edge Research Team

Gold set a record of 5,405 dollars an ounce on the London benchmark on 29 January 2026, then fell to 4,001.80 by 25 June, a decline of 26 percent. It did that while a regional conflict was escalating and Brent crude was trading above 100 dollars a barrel. Understanding why requires abandoning the idea that geopolitical risk moves gold in one direction.

The run into January was one of the largest in the metal’s history. Gold returned about 15 percent in 2023, 25.8 percent in 2024, and 67 percent across 2025 on the London afternoon price, setting 53 record highs in that year alone. It crossed 3,000 dollars in March 2025, 4,000 on 8 October 2025, and 5,000 in late January 2026. The move from 3,500 to 4,000 took thirty six days.

Then it reversed, and the benchmark you use changes the number. This matters more than it sounds, because the two commonly quoted series produce materially different drawdowns.

The London afternoon fix is the institutional benchmark and is used throughout what follows. Intraday spot extremes are always wider, and quoting a peak from one series against a trough from the other produces a number that belongs to neither.

March was the sharpest month of the fall, and it came with the escalation. Gold fell about 12 percent in March to 4,608 dollars an ounce, its weakest month since June 2013 on the World Gold Council’s own measure. The Council’s own account of that month puts substantial weight on market mechanics rather than macro alone: deleveraging, exchange traded fund outflows, liquidation of net long positions on COMEX and a reversal of momentum, all occurring while the geopolitical and inflation backdrop was still nominally supportive. Through early March the conflict intensified and reached energy markets directly. Gulf producers moved quickly to contain the effect on supply. Kuwait invoked force majeure on 7 March, the standard contractual mechanism for a disruption outside a producer’s control, and managed its output accordingly. The United Arab Emirates rerouted exports through the 1.5 million barrel a day Fujairah pipeline, bypassing the Strait of Hormuz. Both responses limited the disruption reaching customers. Brent moved above 100 dollars a barrel on 12 March and finished the first quarter at 118 dollars on the Energy Information Administration’s account. On 10 March the United States Energy Information Administration raised its 2026 Brent forecast to 79 dollars from 58.

Here is the mechanism, and it runs in two directions at once. Conflict raises safe haven demand, which supports gold. Conflict also raises energy prices, which raise inflation expectations, which raise the expected policy rate and with it real yields and the dollar, all of which weigh on an asset that pays no income. The same event drives both channels, and in the first half of 2026 they worked against each other. Which one dominates at any moment is an empirical question rather than a rule, and in March it was settled as much by positioning and liquidity as by macro.

That is not a claim that rates were the only thing that mattered. The World Gold Council states that elevated geopolitical risk was the most significant contributor to first half performance, and that opportunity cost had a mixed effect as markets repriced rate and dollar expectations. Its return attribution model, which measures each driver’s contribution to the variability of monthly performance rather than to the net return, puts momentum at 24 percent, risk and uncertainty at 17 percent, currency effects at 14 percent, economic expansion at 12 percent, interest rates at 3 percent and other factors at 30 percent. The narrative and the model do not sit perfectly together, and both are reported here rather than reconciled.

The real yield is the cleanest read on the second channel. The inflation protected ten year yield was about 1.84 percent in November 2025, about 2.17 percent in May 2026 and 2.44 percent on 17 August. It has risen more or less continuously through the period in which gold gave back a quarter of its value.

The dollar helped in 2025 and has stopped helping. On the Federal Reserve’s broad trade weighted index the dollar fell from about 129.7 in early January 2025 to about 118.1 by late January 2026, a decline of roughly 9 percent over those thirteen months. Across 2026 the index has been essentially flat, near 118.9 in mid-August after touching a one year high in June. A currency that is no longer depreciating no longer adds to the gold price.

Central bank demand is the structural pillar, and this year the data underneath it moved. Official sector buying was 1,092.4 tonnes in 2024 and 863.3 tonnes in 2025, down 21 percent but far above the 473 tonne average of 2010 to 2021. The first half of 2026 came in at 345 tonnes against 415 tonnes a year earlier.

The more interesting development is a revision. The Council originally estimated first quarter 2026 central bank purchases at 244 tonnes and later revised that to about 57 tonnes, reclassifying the difference into over the counter and other demand. Its own stated reason is terse: new data and analysis. The broader difficulty of tracking undisclosed official sector activity is a recognised feature of this market, but it is not the reason the Council gives for this particular adjustment, and the two should not be merged.

Who is buying has changed shape. Over the first half Poland was the largest single buyer at 82 tonnes, ahead of Uzbekistan at 41, China at 40 and Kazakhstan at 27, with the Czech Republic, Singapore, Chile, Jordan and Ghana adding smaller amounts. Turkey was a net seller of about 83 tonnes and Russia of about 44. The buyer list is broader and more European than in previous years, and it now contains genuine two way flow.

The strategic case has strengthened even as the tonnage has softened. On European Central Bank analysis, gold reached about 27 percent of global official reserves by market value at the end of 2025, against 22 percent for United States Treasuries. The ECB is explicit that this shift is largely attributable to gold’s price appreciation rather than to physical accumulation alone, but it changes the starting point for every reserve manager’s allocation decision. The Council’s 2026 central bank survey, with a record 76 respondents, found 89 percent expecting global official gold reserves to rise over the following twelve months and a record 45 percent expecting their own to rise.

Physical demand is being rationed by price. Total demand was 1,269 tonnes in the second quarter, flat year on year, with the first half at 2,522 tonnes, up 2 percent, worth a record 380 billion dollars. Jewellery volume fell 17 percent in the quarter while first half jewellery value rose 22 percent to 86 billion dollars. Consumers are spending more money on less metal.

Two supply side details deserve attention. Mine production rose 2 percent in the second quarter after a 1 percent increase to 3,671.6 tonnes across 2025, so the data do not suggest that primary mine scarcity was a principal driver of the price move. And recycling fell 6 percent year on year. The Council attributes that to prices being lower quarter on quarter, which discouraged the selling of old jewellery, so the supply response ran with the recent price direction rather than against the level.

Exchange traded funds turned positive again in July. The second quarter saw 45 tonnes of outflows, leaving the first half at a net 18 tonne gain. July brought about 3 billion dollars of inflows, lifting holdings 23 tonnes to 4,068 tonnes and assets 1 percent to about 530 billion. Across 2026 to end July, flows are about 11 billion dollars and 39 tonnes. Europe led July with about 2 billion, the United Kingdom at about 875 million and Switzerland at about 657 million. North America added about 71 million and remains negative for the year.

How large is the geopolitical channel on its own? The Council estimates that historically a 100 point monthly rise in the Geopolitical Risk index has lifted gold about 2.5 percent, and describes the metal’s behaviour during this year’s conflict as atypical. JP Morgan analysts have characterised conflict driven moves as spikes of 5 to 10 percent that are sharp but hard to sustain, and explicitly not the main reason for their constructive view. The direct channel is real and it is smaller than headlines imply. The indirect channel, running through oil and rates, is not bounded in the same way, though its magnitude in any given episode is not something the published evidence pins down.

Why it matters: For Gulf investors the lesson of 2026 is that a regional conflict on their doorstep supported gold and undermined it at the same time, and that neither channel can be assumed to dominate. March demonstrated that geopolitical escalation does not guarantee an immediate rise in the price: safe haven demand ran into energy driven inflation concerns, higher yields, crowded positioning, fund outflows and profit taking, and over a short horizon positioning and liquidity can overwhelm the safe haven signal entirely. Anyone holding gold purely as insurance against regional escalation owned an asset that fell about 12 percent in the month the energy disruption first hit hardest. The durable supports are different ones: official accumulation still above its long run average, a reserve allocation backdrop in which gold has overtaken Treasuries by market value, a muted recycling response, and industrial demand growing on semiconductors.

Outlook, and the forecasts are not comparable instruments. They should be read in three separate categories.

Annual average forecasts. The World Bank’s April Commodity Markets Outlook projects gold averaging 4,700 dollars in 2026 and 4,300 in 2027. A Reuters poll of 29 analysts published on 28 July put the 2026 median at 4,509 dollars and the 2027 average at 4,610, both cut sharply from 4,916 and 5,100 three months earlier. HSBC cut its own numbers on 9 July, taking its 2026 average to 4,560 dollars from 4,864 and its 2027 average to 4,925 from 5,000, citing a hawkish shift in United States policy expectations and a firmer dollar. That revision is the clearest single illustration of how far the forecast community moved between January and July.

Period end and quarterly targets. JP Morgan’s research arm updated in June to 6,000 dollars in the fourth quarter of 2026 and 6,300 in 2027.

Scenario analysis, which is not forecasting. The Council’s second half framework describes a base case rangebound within about 5 percent of 4,100 dollars, an upside case between 4,305 and 4,920, and a consolidation case between 3,485 and 3,895. The Council presents these as hypothetical outcomes of its valuation framework rather than as price predictions.

The energy chain is already running, not waiting to start. The Energy Information Administration’s August outlook reports that crude and petroleum liquids through the Strait of Hormuz averaged 4.9 million barrels a day in the second quarter of 2026, against 21.6 million a day in the fourth quarter of 2025 before the conflict. It assumes shipments remain severely constrained through August with flows slowly increasing in September, and expects disruption of about 0.6 million barrels a day to persist through the end of 2027. Brent crossed 100 dollars again on 23 July after reported attacks on tankers in the region. The agency forecasts Brent averaging about 85 dollars in the third quarter, 78 in the fourth, and 69 across 2027.

Treasury has also increased the maximum size of its long maturity liquidity support buybacks from 2 billion dollars to at least 4 billion per operation, beginning in September. That could influence long end liquidity and term premia at the margin, though Treasury describes these operations in terms of market liquidity rather than yield suppression, and their ultimate effect on yields, and therefore on gold, is uncertain.

So the forward question is not whether Hormuz might restart the chain. It is which channel the next energy shock feeds, and how positioning is set when it arrives. A shock into light positioning and a dovish rate path points one way; a shock into crowded longs and a market pricing increases points the other, which is roughly the configuration that produced March. The scheduled tests are close together: the August employment report on 4 September, August consumer prices on 11 September, and the Federal Open Market Committee decision with updated projections on 16 September, where three dissenting votes for an increase are already on the record.

Sources: World Gold Council, Gold Demand Trends for the second quarter of 2026 and for full year 2025, the Gold Mid-Year Outlook 2026 including the return attribution model and the LBMA and spot price extremes, the Gold Market Commentary for March 2026, Central Bank Gold Statistics for June 2026, the Central Bank Gold Reserves Survey 2026 and the press release on the second half outlook · Federal Reserve, Federal Open Market Committee statements of September, October and December 2025 and January, March, April, June and July 2026, H.15 selected interest rates and the H.10 broad trade weighted dollar index · United States Department of the Treasury, announcement on buyback operation sizes · United States Energy Information Administration, Short Term Energy Outlook for August 2026 and of 10 March 2026 · World Bank, Commodity Markets Outlook, April 2026 · Reuters analyst poll of 28 July 2026 and Reuters reporting of the HSBC forecast revision of 9 July 2026 · JP Morgan published research · European Central Bank, analysis of the international role of the euro, June 2026, on gold as a share of global official reserves. Peak to trough calculations on a like for like benchmark basis, the buyer and seller tallies and the separation of forecast types by The Edge Research Team.

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