War rages on, yet gold plunges 30% | Most traders misunderstand the fundamental logic

The conflict continues unabated, and gold has retraced nearly 30% from its peak. Pause for a moment and consider this: it’s not that the smoke of battle has cleared or peace has arrived. Airstrikes over the Red Sea persist, Houthi missiles keep targeting commercial vessels in shipping lanes, and geopolitical risks around key straits are plainly visible. Yet gold—the asset humanity has relied on for millennia as a wartime safe haven—has seen a sharp price decline amid escalating hostilities.

Many see this as a market paradox, but to me, it’s a straightforward question—one most investors get wrong. The root cause is simple: the way people frame the question itself contains a flaw. Everyone asks: 'If there’s war, why is gold falling?' This statement hides a critical misconception—most assume markets price in news events that have already occurred.

Remember the core takeaway: the market never pays for events that have already happened—it only relies onexpectation gapexpectations. Fully grasp this principle, and you’ll make sense of all recent moves in gold, crude oil, the dollar, and US equities.

The surge in gold prices early this year, which pushed it to a high of $2,595 per ounce, wasn’t fundamentally driven by war. At that time, large-scale conflict had not yet fully erupted. Instead, gold was propelled by two intertwined expectations: upside inflation risks and market bets that the Federal Reserve would begin cutting interest rates.

These two narratives reinforced each other: fear-driven demand lifted gold’s risk-premium, while expectations of monetary easing reduced the opportunity cost of holding non-yielding assets like gold. Gold thus benefited from dual tailwinds. During that period, US equity markets also showed divergence—investors allocated capital to precious metals for hedging while simultaneously positioning for valuation rebounds in growth stocks once rate cuts materialized.

But what followed is clear for all to see: it wasn’t that war arrived and gold failed—it’s that both key expectations were successively fulfilled and then faded away. The conflict shifted from ‘potential outbreak’ to sustained,常态化 fighting, eliminating the geopolitical expectation gap; meanwhile, markets had initially priced in multiple rate cuts within the year, but now the timing of cuts keeps getting pushed back, erasing the dovish outlook. With both pillars supporting gold prices removed, the subsequent decline was simply the natural result of capital repricing.

At this point, it becomes clear: gold’s rally early in the year wasn’t trading actual warfare—it was pricing the market’s imagination of uncontrolled escalation. Once the risk materialized and investors adapted to the reality of ongoing hostilities, the safe-haven premium evaporated rapidly. This was gold’s first round of losses, stemming from the unwinding of expectation gaps—but it was only the beginning.

Over the past five months, this Middle East conflict has undergone three distinct shifts in how capital markets perceive its nature—each one completely rewriting asset pricing dynamics.

Phase one: sudden outbreak. Fighter jets took off, shipping lanes were blocked—everything was uncertain. No one knew how long the conflict would last, whether it would spread, or what the ceiling for oil prices might be.Uncertainty is the only true fuel for safe-haven premiums.Phase Two: prolonged stalemate. Three months into the conflict, its contours have become clear. Strait shipping lanes have been repeatedly blocked and briefly reopened; ceasefire talks have collapsed and restarted; airstrikes have settled into a steady rhythm, with both sides calibrating their retaliatory actions carefully. What began as an unpredictable unknown has now become a familiar norm for everyone. The logic is simple: insurance premiums rise only when risk boundaries are ambiguous. Once markets clearly perceive the upper limit of risk, risk premia steadily shrink. Phase Three—the core dynamic most U.S. equity investors fail to grasp—is the instrumentalization of the conflict.

We梳理a series of recent key developments: after more than ten consecutive nights of airstrikes by Trump, he voluntarily hit pause—not because he was forced to by his adversary. Shortly afterward, Iranian military officials stated that if the U.S. halted strikes, Iran would suspend retaliation.Meanwhile, U.S. strategy has visibly shifted away from relying solely on aerial deterrence and introduced a new mechanism: losses incurred by commercial vessels from attacks will be directly offset against Iran’s frozen overseas assets. Connecting these dots leads to a critical conclusion: control over the conflict has changed hands. What was once an unpredictable geopolitical crisis has become a dial Washington can freely adjust. Need to apply pressure? Resume airstrikes or threaten critical infrastructure. Want de-escalation? Halt military operations and send negotiation signals. Prefer sustained attrition without full-scale war? Activate the asset-claim mechanism. Once conflict becomes a controllable dial—and markets judge that those in power will do everything possible to prevent total collapse—the entire logic flips. Predictable and manageable risks require no gold hedge; institutions only need minor parameter adjustments in their earnings models. A managed conflict cannot generate sustained panic—it merely keeps pushing global energy costs higher.

This represents the second—and most severe—blow to gold prices.

There are two main drivers behind the pressure on gold. The first is the safe-haven sentiment just discussed, which has largely lost effectiveness. The second driver—oil prices, inflation, interest rates, and the U.S. dollar—remains potent, simultaneously suppressing gold and influencing U.S. equity valuations.

Tensions between Saudi Arabia and the Houthis have escalated again. Although there’s positive news regarding strait navigation talks, shipping conditions haven’t materially improved. A brief ceasefire memorandum in June lasted only three weeks before collapsing following fresh attacks on merchant vessels. The latest ceasefire proposal was rejected by Iran, plunging multiple parties into a Rashomon-like scenario of mutual denials. All signals point to one conclusion: oil prices are unlikely to see a deep correction.

Last Friday, Brent crude oil prices reclaimed the $100-per-barrel level. Persistently high oil prices are obstructing the pace of disinflation; as long as inflation remains sticky, the Federal Reserve has no reason to cut rates. Current Fed Chair Waller has a clear policy style: streamlined policy statements, abandonment of the dot plot, and public termination of forward guidance. All his signals boil down to one message: don’t expect monetary easing until inflation has stably returned to target.

With interest rates staying elevated and the dollar maintaining relatively high levels this year, global capital continues flowing back into dollar-denominated assets. U.S. Treasuries offer stable coupon yields, and quality U.S. equities keep attracting long-term capital. Meanwhile, the holding cost of zero-yielding gold keeps rising, weighing heavily on its price as it struggles repeatedly around the $4,000 mark.

The cruelest aspect of this entire chain is this: the conflict hasn’t stopped, yet risk premia have already been exhausted. A recent series of de-escalation signals—suspended airstrikes, revived negotiations, and mutual pledges to halt retaliation—continues to erode safe-haven demand. Yet none of these developments alter the fundamental energy outlook. As long as strait shipping remains unrecovered, fighting persists, and a durable ceasefire remains distant, oil prices retain firm support, inflationary pressures endure, and rate-cut expectations keep getting pushed further into the future.

There is now a widespread misconception in the market: that gold will rise once the war ends. This idea is entirely wrong. It is precisely the current stalemate—'too big to escalate fully, yet impossible to end'—that is most damaging to gold. If the conflict escalates comprehensively, panic returns and gold has room to rebound; if the conflict ends decisively, oil prices retreat, inflation cools, and expectations for rate cuts re-emerge—gold would again have solid grounds for appreciation. Only in the current semi-stalemate scenario—where panic has faded but inflationary pressures persist—does gold find itself disadvantaged on both fronts. And this environment is no accident; it is precisely the optimal outcome engineered by U.S. strategic maneuvering.

We break down three coordinated strategies the U.S. is actively advancing: First, turning defense into offense. By leveraging attacks on commercial vessels, the U.S. positions itself as a victim seeking compensation, using frozen Iranian overseas assets to offset losses and transforming military conflict into financial leverage. Second, during intermittent cease-fire windows, it systematically courts Middle Eastern countries to solidify its regional alliance network. Third, it moderately expands the conflict’s spillover while deliberately stepping back slightly, thereby repositioning itself as a balanced mediator.

Many believe the goal of this strategic framework is to win the conflict outright, but tracing the full sequence of actions reveals a more precise objective:Deliberately avoiding a definitive end to the war. None of these three strategies aims at concluding the conflict; all are designed to sustain the stalemate. Ending a war allows benefits to be harvested only once; a controlled, prolonged standoff enables continuous achievement of strategic goals.

The evidence is strikingly clear: negotiations for a 30-year U.S.-Saudi security agreement are steadily progressing, with Trump deeply linking this deal to Saudi Arabia’s accession to the Abraham Accords. Such negotiations require leverage—and an ongoing regional threat is the strongest bargaining chip. As long as the risk persists, Saudi Arabia’s incentive to seek U.S. security guarantees and make diplomatic concessions will not vanish.

The pattern of courting regional partners is unmistakable: Iraq signed a major oil cooperation deal with the U.S., accelerating its return to the petrodollar system; the UAE fast-tracked a trillion-dollar investment into the U.S. to secure relaxed restrictions on advanced semiconductors; and on the very day the Saudi sovereign wealth fund signed a memorandum of understanding with the U.S. Export-Import Bank, coalition forces launched airstrikes.

The underlying fuel powering this entire strategy is the sense of crisis generated by the conflict. If hostilities fully subside, Middle Eastern countries lose their urgent motivation to pay for security. The optimal scenario is thus one where conflict persists—but without spreading to their own territories.

Another easily overlooked detail: reports emerged that Bahraini and Kuwaiti fighter jets had entered the fray, but the subsequent denial came not from Kuwait’s domestic authorities, but from the Kuwaiti embassy in Washington. This act of clarification matters far more than its content—it is fundamentally about maintaining conflict intensity and preventing rapid de-escalation.

Finally, for us U.S. equity traders, the key pricing mechanism today is: controlled geopolitical tension → high oil prices → resilient inflation → persistent delays in Federal Reserve rate cuts. This logic not only weighs on gold but also continues to suppress high-valuation growth stocks, while providing medium- to long-term support for U.S. energy equities.

Going forward, watch closely for two key inflection points: first, the substantive resumption of cross-strait shipping, which would drive oil prices steadily lower; second, a significant decline in U.S. core inflation, prompting markets to reprice the timing of rate cuts. Until both conditions materialize, gold is unlikely to sustain a major bull market, and the U.S. dollar and Treasury yields will likely remain relatively strong.

Stop clinging to the outdated notion that 'you must buy gold whenever there’s conflict.' For all asset trading going forward, first clarify whether the market is pricing in the event itself or market expectations. It is the divergence between reality and expectations—the expectation gap—that truly drives major trends.

Follow me for deeper analysis on how this geopolitical博弈 will influence sector rotation in U.S. equities and the medium- to long-term dynamics of crude oil and precious metals.

146K Views