Why Gold Is Falling Even as Conflict in the Middle East Escalates

Brent crude crossed above $100 a barrel last week, all due to a 20-mile-wide stretch of water some 6,500 miles away from the U.S.
Tanker traffic through the Strait of Hormuz—the Persian Gulf bottleneck that carried roughly a fifth of the world’s seaborne oil before the fighting started—has fallen to virtually zero. Before the war, some 80 vessels made the transit on a good day. The recent high-water mark is 25.
Now Iran is working a second front, leaning on its Houthi allies in Yemen to threaten the Bab el-Mandeb, the southern gate to the Red Sea. It’s about as narrow as Hormuz. With Saudi Arabia pushing more barrels through its East-West pipeline to the port of Yanbu, an attack there would put something like 4.5 million barrels a day at risk. And unlike Hormuz, it would foul container traffic bound for Suez, sending Europe-Asia freight the long way around the Cape of Good Hope.

Meanwhile, the U.S. Strategic Petroleum Reserve is at its lowest level since 1983. President Trump authorized releasing up to 172 million barrels back in May to hold prices down. It worked, for a while, but traders are now talking about “tank bottoms,” the point at which pulling more oil out gets physically difficult.

Why Gold Hasn’t Rallied on the War
Gold is supposed to be the asset you own when wars break out and tankers stop moving, so I get why some investors have been frustrated in recent months. Instead of soaring, the yellow metal has been stuck near $4,000 an ounce, down roughly a fifth since the strikes on Iran began in late February, and well off its January record near $5,600.
The reason for this isn’t a mystery. Oil prices have increased, pushing up inflation and interest rate expectations. Gold prices, as a result, have been pressured.
You can watch it in the bond market. The U.S. 10-year yield touched 4.71% last week, its highest level since January 2025. German bunds hit levels not seen since 2011. The Federal Reserve and the Bank of England both meet this week, and both are expected to hold rates steady while flagging the risk of hikes down the road.

Longtime readers know I’ve argued for years that the single most important variable for the gold price is the real interest rate. When real rates climb, the metal has tended to struggle because, unlike fixed income, it doesn’t bear interest.
The foreign share of U.S. Treasury holdings has also fallen from about 56% in 2008 to 30% at the end of 2025. The marginal buyer of government debt is now a price-sensitive American, and those buyers demand more compensation in higher yields. I don’t believe this will reverse significantly when the shooting stops.
China Is Buying the Weakness
The People’s Bank of China bought 15 tonnes of gold in June—its largest single-month purchase since October 2023—bringing official holdings to 2,346 tonnes. That represents 20 consecutive months of accumulation, the longest streak on record, according to the World Gold Council (WGC).
Focus not just on what China is doing, but how. Its rate of accumulation has accelerated as the price of gold has fallen. The country added 40 tonnes in the first half, during which gold lost close to 30% of its value from its all-time high in late January. Analysts at New York-based hedge fund Zweig-DiMenna calculate roughly $5.7 billion of Chinese purchases in H1, most of it in the second quarter, against about $2 billion in all of 2025, when gold was rallying hard.
I believe China could be making a bet for the ages, if John Paulson’s forecast turns out to be accurate. The legendary hedge fund manager, who made billions shorting the subprime mortgage market in 2007, told CNBC last week that he believes we’re still in the early innings of a long-term gold rally.
“As people lose faith in paper currencies, gold as an alternative will continue to grow,” Paulson said, adding that the metal “is becoming the most apt reserve currency in the world, replacing fiat currency.”
Miners Are Printing Cash at $4,000 Gold
I want to highlight another comment Paulson made during his interview. Investors, he said, could stand to benefit even more by maintaining exposure to gold miners on top of the metal. I agree, which is why I’ve long recommended a 10% weighting in gold, split evenly between physical bullion and gold mining stocks.
Gold has averaged roughly $4,700 an ounce so far in 2026 against all-in sustaining costs (AISC) of below $2,000. Even at $4,000, that’s an extraordinary margin, and it’s showing up as free cash flow, net cash balance sheets and buybacks. Scotiabank expects meaningful share repurchases from Newmont, Barrick, Agnico Eagle and Kinross. RBC’s Josh Wolfson describes producers as operating from a position of strength.
As projected, Newmont reported record free cash flow in the second quarter, generating $2.2 billion after producing some 1.3 million ounces. The Denver-based company also announced a $0.26-per-share dividend. Newmont and Barrick, which is scheduled to report next month, are expected to post combined second-quarter profits of around $3.5 billion, which would be massive.
The World Remains Underweight
By historical standards, gold investment remains grossly underweight. As a percent of portfolios, gold accounts for low-single-digit exposure. With metal prices off 30% from their record high, now might be time to consider accumulating.
Keeping your exposure to between 5% and 10% and rebalancing regularly helps with discipline. No need to have an opinion on the Strait of Hormuz.
China’s central bank isn’t trying to time the market, and I don’t think you should either.

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Originally Posted 2026 – Why Gold Is Falling Even as Conflict in the Middle East Escalates

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Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (06/30/2026): Newmont Corp., Barrick Mining Corp., Agnico Eagle Mines Ltd.