Why Gold Prices Are Falling During War, Not Rising

Summary

Contrary to traditional expectations of gold prices rising during conflict, the opposite is happening with the recent Iran war, creating a "peace premium" instead of a war premium. Escalations in the war cause gold prices to fall, while rumors of peace talks lead to rebounds, a pattern observed repeatedly over the past 10 weeks. This counterintuitive behavior stems from the current global economic situation, specifically the US's high debt-to-GDP ratio, which is now at World War II levels. For the US to manage its debt, interest rates need to decrease, and inflation must remain low. Low inflation, in turn, requires low oil prices. Achieving low oil prices necessitates peace, as conflicts can disrupt supply routes like the Strait of Hormuz and damage infrastructure. Therefore, peace is crucial for the US to service its debt, leading investors to anticipate lower real interest rates during peaceful periods, which drives gold prices up. Conversely, war and the potential for oil price spikes negatively impact real interest rates and thus gold prices. For short-term traders, this creates an opportunity to profit from the inverse relationship between war and peace. However, for long-term investors, the ongoing geopolitical tensions are seen as temporary noise, as the fundamental drivers for gold, such as central bank buying and persistent debt issues, remain strong. This presents an opportunity for long-term investors to buy gold at a discount when prices fall during war.