Geopolitical tensions between the US and Iran have disrupted global oil transport, damaged energy infrastructure, and heightened concerns that the conflict could be prolonged. However, gold, typically viewed as a safe-haven asset during periods of economic uncertainty, has experienced a sharp decline.

Gold prices fell nearly 10% this week, on track for their worst weekly performance in 43 years. Since the outbreak of the conflict, gold has dropped a cumulative 13%.

During turbulent times, investors often buy gold, betting it will retain its value amid soaring inflation, currency devaluation, or crises. Yet, the surge in energy prices triggered by the Middle East conflict is prompting central banks worldwide to reassess their interest rate outlook, which is crucial for gold's trajectory.

The turmoil has also fueled a US dollar rebound and forced investors to reposition their portfolios.

The core reasons are as follows:

Traders now expect the Federal Reserve to keep interest rates unchanged this year, enhancing the appeal of income-generating assets like bonds and diminishing the attractiveness of non-yielding gold.

Fed interest rate decisions significantly impact markets. The Fed has held rates steady for two consecutive meetings, and according to the CME FedWatch Tool, traders have priced in no further rate cuts this year.

When the Fed cut rates three times in quick succession last autumn, gold prices surged dramatically. Now, with expectations that the Fed will maintain higher rates for months to come, bond yields are rising, increasing the opportunity cost of holding gold.

"The rise in yields has played a significant role in the recent sharp decline in gold prices," said Hardika Singh, an economic strategist at Fundstrat.

It's not just the Fed; central banks globally are adjusting policy rates in response to the Iran conflict and energy price disruptions. Inflation concerns are forcing central banks to hold rates steady, with some, like the Reserve Bank of Australia, even opting to raise rates.

A rebound in the US dollar this month has made dollar-denominated gold more expensive for international investors.

The dollar's movement is another key factor influencing gold prices.

A weaker dollar typically benefits gold, as it lowers the purchase cost for global investors. Since the Iran conflict began, the dollar has risen 2.2%, ending a months-long downtrend. The dollar's rebound is now dampening gold's appeal.

Safe-haven demand, inflation worries, and expectations of rate hikes have collectively pushed the dollar higher, signaling another market concern: traders fear the Iran conflict could negatively impact the global economy.

After substantial gains over several months, speculative fervor around gold is cooling. Investors may also be selling gold to cover losses in other assets.

Following a strong two-year rally, gold's upward momentum is fading.

Gold surged 64% in 2025, marking its best annual performance since 1979, and in January of this year, it reached $5,000 per troy ounce for the first time.

For now, at least, the market frenzy is subsiding. On Friday, gold was trading around $4,570 per troy ounce, erasing all gains from the previous two months.

The previous rapid price increase was partly driven by retail investors chasing the rally, making recent price action resemble that of a meme stock rather than a traditional safe-haven asset.

"The upward momentum has faded, and some investors are selling gold to raise cash or adjust their portfolios," strategists at ING said in a report.

Nevertheless, many strategists remain optimistic about gold's prospects. The dollar's rebound may fade, while geopolitical uncertainty remains high. Wall Street veteran Ed Yardeni maintains his year-end price target of $6,000 for gold.

"If gold continues to ignore factors that should typically push its price higher—such as geopolitical turmoil, rising inflation, and increasing US government debt—we would consider adjusting our year-end target back to $5,000," Yardeni said in a report.