Central bank demand has been a key driver of gold's historic rally since late 2022, but this support may be ending—at least for the foreseeable future—as conflict in Iran forces policymakers to prioritize energy security and economic stability over reserve diversification. This shift in priorities comes at a particularly vulnerable time for the gold market. Gold prices recently experienced their sharpest weekly decline since the 1980s, following what one senior investment strategist described as a speculative "blow-off top" earlier this year.

After hitting a record high in late January, gold has struggled to regain upward momentum, even as geopolitical tensions have escalated. This represents an unusual divergence for an asset traditionally viewed as a safe haven. The breakdown in gold's typical behavior reflects a broader shift in market dynamics. Rising nominal and real interest rates are diminishing gold's appeal, while anticipated safe-haven flows are favoring liquidity—specifically the U.S. dollar—over traditional hedges like gold or U.S. Treasuries.

Even government bonds have failed to attract demand, with yields climbing to multi-month highs, highlighting how inflation and supply shocks are dominating investor sentiment. In the current environment, even inflation-protected securities are not considered safe havens, as they are also sensitive to duration risk and rising real yields.

Meanwhile, speculative positioning in gold is becoming a growing headwind. The $4,500 per ounce level is seen as a key psychological barrier. If investors are forced to liquidate positions due to broader portfolio pressures, gold prices could fall further. Speculators now face a difficult decision. Many attempted to wait out the volatility in February, but a significant amount of capital is now underwater, and conditions may only worsen.

These speculators cannot rely on central banks to provide much-needed support. Many central banks that fueled gold's rally are also net energy importers. As oil prices surge, driving up costs for liquefied natural gas and fertilizers, their fiscal resources are being redirected toward securing essential supplies. Capital that might have been allocated to gold reserves is now being used to "keep the lights on"—funding energy, food, and critical infrastructure needs.

This reallocation helps explain why gold has not responded positively to escalating geopolitical risks. Safe-haven demand is being replaced by a scramble for liquidity. Nations and corporations are prioritizing access to U.S. dollars to purchase energy and maintain supply chains, rather than accumulating gold. The longer this situation persists, the worse it becomes; it supports oil prices, harms the global economy, but does not benefit gold.

Looking ahead, the duration of the conflict—particularly ongoing disruptions to energy supplies—will be a critical factor. A four-to-six week window is viewed as a potential turning point. If oil prices remain elevated into mid-April, businesses and consumers will begin making longer-term adjustments, including passing higher costs through to end markets. This could deepen inflationary pressures and further tighten financial conditions.

For gold, this creates a challenging backdrop. Supply-driven inflation tends to push bond yields higher, which historically pressures non-yielding assets. At the same time, traditional defensive assets are failing to provide protection, leaving investors with fewer clear hedging options. There are no immediate signs of a structural shift in the U.S. dollar or Treasury markets that would revive gold's appeal.

Gold is expected to undergo a period of consolidation as speculative excess is squeezed out and the macro environment stabilizes. Central bank buying may eventually resume, but only after geopolitical disruptions ease and energy markets normalize. Until then, gold investors must navigate an unfamiliar landscape where war, inflation, and supply shocks are not driving safe-haven demand for gold, but are instead diverting capital away from it.

A reset is currently underway. Central banks are not accumulating gold at current price levels. They are not price-sensitive hedge funds marking their gold reserves to market; due to societal needs, they now have demand for other assets that are more critical and scarce.

Another analyst also suggested that central banks, after a period of heavy buying, may now be forced to sell gold, exposing the metal to further downside risk. A metals analyst warned that gold could fall toward $4,000 per ounce amid heightened global uncertainty and inflation concerns. Recent selling pressure indicates that central bank selling may be more than just rumor. While a potential hawkish shift in global monetary policy due to rising inflation is a headwind for gold, it does not fully explain the sharp decline.

The primary driver appears not to be inflation concerns or policy shifts, as that would have caused significant moves in the U.S. dollar index and the 10-year Treasury yield, which were absent. The decline is more likely due to some central banks selling gold to support their currencies or fund energy purchases. Additionally, there may have been larger-than-usual selling from physically-backed ETFs as prices fell sharply and Treasury yields rose.

The two key drivers behind last year's unprecedented gold rally have reversed. If this analysis holds, gold could face downward pressure for the foreseeable future. However, while a drop below $4,100 is possible, lower prices are also seen as a long-term buying opportunity. The long-term trend for gold is not seen at the low end of $4,000 per ounce. If damage to energy infrastructure is limited and oil prices quickly retreat to pre-conflict levels, central banks' willingness to buy gold could strengthen again, potentially allowing prices to return to a sustained level above $5,000.