Why Is Gold Falling Despite the Ongoing War?

Gold reached around $5,600 per ounce, which is an all-time high for the yellow metal on 28 January 2026. That single session saw gold gain over $300, driven by a Federal Reserve decision to hold interest rates steady combined with escalating US-Iran tensions.

As of 17 March 2026, gold trades at approximately $5,014 per ounce, as per Trading Economics. That is a decline of over $575, or roughly 10.3%, in seven weeks. 

For most Indian retail investors, this is quite confusing. The Iran-Israel conflict has shut the Strait of Hormuz. Crude oil has surged past $100 a barrel and peaked at $119.50 in mid-March.

Read more about it here.

Equity markets since then have been crashing. By every conventional logic, gold, which is the world's oldest safe-haven asset, should be climbing. Instead, it is falling.

The reason is that gold does not simply rise when the world becomes dangerous. It rises under a specific set of conditions. Currently, those conditions are temporarily working against it.

The Dollar-Gold Inverse

Gold is priced globally in US dollars, which means buyers around the world effectively purchase it using their local currency converted into dollars. When the dollar strengthens, gold becomes more expensive for buyers using other currencies like the rupee, euro, or yen. This reduces the purchasing power of non-US buyers and can slow global demand, which in turn puts downward pressure on gold prices.

In March 2026, the U.S. Dollar Index (DXY) rose to around 100.50, its highest level in months, according to MarketWatch, as investors moved money into the world’s reserve currency during market uncertainty. A stronger dollar often compresses gold prices because it makes the metal more expensive for the rest of the world to buy, even at times when geopolitical risks would normally support gold demand.

The Fed Factor: Rate Cuts Pushed Out

We know that gold pays no interest or any dividend. Its attraction as an asset lies in being a hedge against inflation and currency devaluation, and it becomes comparatively attractive when real interest rates are low. The oil shock changed that calculus.

With Brent crude surging above $100, US inflation expectations rose sharply. Markets have now pushed their expectations for a Federal Reserve rate cut to September 2026 at the earliest, removing any chance of a reduction at the May meeting. The yield on 10-year US Treasury Inflation-Protected Securities, which are considered the cleanest measure of real rates, sat at approximately 1.74% in early March, as per Business Standard. At that level, bonds present real competition for gold for the first time in years. Institutional managers who hold gold as a zero-yield hedge are weighing it against fixed-income instruments that now offer positive real returns.

The Liquidity Trap: Selling What You Can

The third factor is the least intuitive but the most important in the short run.

When equity markets fall sharply, as they have this March, many institutional investors tend to face margin calls due to their losing positions. As a result, they must post additional collateral or close positions quickly. Gold is one of the most liquid assets in the world: it trades around the clock with tight bid-ask spreads. When fund managers need to raise cash urgently, gold gets sold. Not because they have turned bearish on it, but because it is one of the few assets they can exit at a fair price on short notice.

This same dynamic played out in the 2008 financial crisis and in March 2020 during the COVID crash. The initial reflex in a liquidity crunch is to sell whatever is liquid. Due to this, Gold suffers in the immediate term precisely because it is trusted.

What It Means for Indian Investors

For Indian buyers of physical gold or gold ETFs, the rupee-term decline is materially cushioned by currency depreciation. A weaker rupee means MCX gold prices have not fallen as sharply as the international dollar decline implies. Therefore, if the US gold price falls by 10%, the fall in India is less significant, as the price adjusts in response to currency changes.

The current weakness is a function of short-term liquidity dynamics, dollar strength, delayed Fed cuts, and forced institutional selling, and not a fundamental shift in how the world values gold. The conditions that drove gold to around $5,600 have not reversed. They are paused while markets absorb a geopolitical and energy shock simultaneously.

When the dust settles, gold tends to recover. 

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Gold and commodity prices are subject to market risk. Please consult a registered financial advisor before making any investment decisions.