Why Gold Prices are Falling Despite War: Gold Analysis

Gold is usually seen as a safe asset during uncertain times. So when geopolitical tensions rise, investors expect gold prices to move up. However, the recent price action tells a different story. Gold (MCX April futures) is currently around ₹1,48,372, and while it is up about 2.36% today, it is still down around 7.5% over the past week overall.

This means that even after today’s recovery, gold remains significantly lower compared to last week. The key reason is that macroeconomic factors like interest rates and bond yields are currently stronger drivers than safe-haven demand.

Interest Rates and Bond Yields Are Driving the Move

The biggest shift has come from interest rate expectations. Earlier, markets were expecting the US Federal Reserve to start cutting rates in 2026. That view has now changed. Rates are expected to stay higher for longer.

This directly impacts gold.Gold does not generate any income. So when interest rates rise, investors prefer assets that offer returns, like bonds. At the same time, bond yields have also moved up. Bond yield simply means the return you earn from holding a government bond. When yields rise, bonds become more attractive compared to gold. This combination has led to money moving out of gold.

In simple terms:

• Higher interest rates reduce gold’s appeal
• Rising bond yields pull investors towards fixed income

Oil Shock and Inflation Are Adding Pressure

Geopolitical tensions have pushed oil prices higher, which has increased concerns around inflation. Normally, rising inflation supports gold, as it is seen as a hedge against rising prices. However, this time the impact is different. Higher inflation is forcing central banks to remain strict with their policies, keeping interest rates elevated and liquidity tight. As a result, instead of supporting gold, inflation is indirectly putting pressure on prices.

Profit Booking and Position Unwinding

Gold had already seen a strong rally and had touched a high of around ₹1,83,962 earlier this year. After such a sharp run-up, some level of correction is normal. Investors begin to book profits, which leads to selling pressure.

Alongside this, there is another important factor called position unwinding. This happens when traders who are using borrowed money are forced to exit their trades as prices fall, which accelerates the decline.

So the recent fall is not just about fundamentals, but also about market behaviour. Profit booking created the initial selling, and forced exits made the fall sharper.

Central Banks: Buyers First, But Not Always

Over the past few years, central banks have been steady buyers of gold. Many countries increased their reserves to diversify away from the US dollar and strengthen their financial position during uncertain times.

However, in prolonged conflict situations, priorities can shift. Wars require heavy spending on defence, energy imports, and overall economic stability. In such cases, governments may look at gold not just as a reserve asset, but also as a source of liquidity that can be used when immediate funds are needed.

There have already been some early signs of this. Poland, which was one of the largest buyers of gold recently, has discussed the possibility of selling a part of its reserves. Russia has also sold gold in the past to support its finances. This is not a widespread trend yet, but it highlights that gold can shift from a safe-haven asset to a funding tool depending on the situation.

Why Gold Can Fall First During a Crisis

Gold is one of the most liquid assets in the world, which means it can be quickly sold and converted into cash when needed.

Because of this, in the early phase of any crisis or stress, both governments and investors may choose to sell gold. Governments may do this to raise immediate funds, while investors may exit positions to manage risk or cover losses elsewhere.

This creates short-term selling pressure on prices. As a result, even during periods of war or uncertainty, gold can fall initially due to its liquid nature before its safe-haven demand starts to play out.

What Could Happen Next

Once immediate liquidity pressures ease, the trend can start to shift. Here are some plausible scenarios:

1. Immediate Stress Can Trigger Selling

In the early phase of a crisis, the need for cash often becomes the biggest priority. Governments may sell gold to raise funds, while investors may reduce exposure to manage risk. This can create short-term pressure on gold prices.

2. Liquidity Pressure Does Not Last Forever

Once the immediate need for cash starts easing, forced selling usually slows down. At this stage, gold prices may begin to stabilise as the market absorbs the earlier selling pressure.

3. Safe-Haven Demand Can Return

If uncertainty remains high, investors often turn back to gold for protection. Central banks may also resume buying to strengthen reserves. This is when gold starts behaving like a safe-haven asset again.

4. Gold May Move in Phases, Not in a Straight Line

Historically, gold does not always rise immediately during a crisis. It can first fall due to liquidity pressure, then stabilise, and later recover if uncertainty continues. For investors, this means gold’s reaction can be delayed rather than absent.

What Should Investors Do or Watch?

Instead of reacting to short-term moves, investors should focus on a few key signals and practical steps:

• Track interest rates, bond yields, and the US dollar. If rates and yields start falling or the dollar weakens, gold may get support
• Keep an eye on central bank activity and inflation trends, as these influence long-term demand for gold
• Avoid taking highly leveraged positions, as sharp moves can lead to forced losses
• Do not react to short-term volatility. Gold can move in phases during uncertain times
• Review your portfolio allocation calmly. Gold works better as a long-term hedge rather than a short-term trade

Conclusion

Geopolitical tensions have pushed oil prices higher, which has increased concerns around inflation. Normally, rising inflation supports gold, as it is seen as a hedge against rising prices. However, this time the impact is different. Higher inflation is forcing central banks to remain strict with their policies, keeping interest rates elevated and liquidity tight. As a result, instead of supporting gold, inflation is indirectly putting pressure on prices.

Disclaimer

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