The Gold Trade Broke When the Dollar Didn't

Gold delivered one of the strongest years on record in 2025, rallying roughly 72% and setting multiple all-time highs along the way. In late January, the metal broke above $5,000 and came within striking distance of $5,600.

That run already feels distant. Gold has since fallen to under $4,400, a 22% drawdown from its January peak. The question we get most often right now is simple: is this a dip worth buying, or is there more downside still ahead.

The honest answer depends entirely on your time horizon.

Three Years of Central Bank Buying Built This Rally

To understand the drawdown, it helps to understand the rally. The move higher began in late 2022, after Russia's invasion of Ukraine and the subsequent U.S. decision to freeze Russia's foreign exchange reserves.

That single decision sent a message that resonated across every central bank in the world. Holding reserves in dollars, or in dollar-denominated assets, carries real geopolitical risk. In response, central banks began diversifying away from the dollar and into gold at a pace not seen in decades.

That sustained buying pressure, layered on top of broader geopolitical uncertainty and rising concern about currency debasement, is what pushed gold to new highs throughout 2025. The January peak near $5,600 was the culmination of three years of central bank accumulation and safe haven demand, not a single catalyst.

Why a War Sent Money Into Dollars Instead of Gold

The Persian Gulf war that began in late February changed the calculus entirely. When geopolitical stress escalates, capital typically flees into the dollar first, not gold. It is counterintuitive, but it is how these episodes have historically played out.

The U.S. dollar index is up roughly 3% since the day before the war began. That matters enormously for gold, since gold is priced in dollars globally. A stronger dollar makes gold more expensive for foreign buyers, which suppresses demand at the margin.

The war has also pushed oil prices higher, which has pushed inflation expectations higher with it. The Federal Reserve has responded with a more hawkish posture, with rate hikes now likely later this year.

Rising rates are one of the more reliably negative forces for gold. It is a non-yielding asset. When Treasuries pay 4-5%, the opportunity cost of holding an asset that generates no income becomes harder to justify.

Central banks have compounded the pressure. Several, including Turkey, have been forced to sell gold reserves outright to defend their own currencies during the conflict. When the largest buyers in the market flip to sellers, that removes one of the structural pillars that had been supporting price for years.

Together, these forces erased nearly two years of gains in a matter of months.

Everything Hinges on How the War Ends

In the near term, gold's price is tethered almost entirely to the trajectory of the Iran war. As long as the conflict continues, the dollar likely stays firm and rates likely stay elevated. Both remain headwinds.

Should the war conclude, the picture could shift quickly. Oil would likely retreat from its spike, easing inflation pressure. The dollar would likely soften as the acute fear premium fades. Rates could stabilize, or even decline, if inflation cools alongside it.

A weaker dollar, lower rates, and no war premium would be a genuinely bullish combination for gold. A rebound toward $4,800 to $5,000 is plausible on a resolution, and it could happen quickly.

That said, timing a war's end is not an investment strategy, it's a guess. The conflict could persist for months or years. In that scenario, gold stays under pressure for an extended period.

The De-Dollarization Trend Paused, It Didn't Reverse

Despite the near term headwinds, the structural case for gold has not changed.

Central banks still want to reduce dollar exposure. The 2022 freezing of Russia's reserves proved that geopolitical risk is real, not theoretical, and that risk has not been priced away simply because gold has pulled back. The diversification trend has paused, not reversed.

Once the Iran conflict resolves and geopolitical tension eases, we would expect central banks to resume accumulating gold reserves. The broader shift away from a dollar centric reserve system is a multi year trend, and one drawdown does not undo it.

Gold also remains one of the more effective hedges against sharp market dislocations. A 5-10% allocation provides real portfolio diversification without requiring precise timing. You hold it for the moments when everything else is falling apart at once, not for the months in between.

Our Read on the Entry Point

The answer depends on your view of the war and your time horizon, and we think it's worth being direct about both scenarios rather than hedging the call.

If the Persian Gulf conflict resolves within the next few months and central banks resume diversification as we expect, gold under $4,400 will look cheap relative to the $5,000 plus levels achievable within 12 to 18 months. Under that scenario, buying here is defensible.

If the conflict drags on and the Fed hikes aggressively to fight inflation, gold could drift toward $4,000 or lower before finding a floor. Under that scenario, waiting for a better entry is the more disciplined choice.

Nobody knows with certainty how long the war lasts or how aggressive the Fed will ultimately be. For investors with a 3-5 year horizon who believe in the long term central bank demand story, entry price matters less than position size and patience. Build a small position now and add if it falls further.

For traders looking to catch a short term bounce from current levels, that is a fundamentally different bet, one built on the war ending soon, and a much riskier one.

How to Get Exposure

Physical gold, coins and bars, is the most direct route but requires storage and insurance. For most investors, ETFs are the more practical vehicle.

SPDR Gold Shares (GLD) is the world's largest physically backed gold fund. It holds actual bars in vaults, giving investors real gold exposure with equity like liquidity.

VanEck Gold Miners ETF (GDX) offers a different kind of exposure entirely, through equity in mining companies rather than the metal itself. Miners carry more volatility than gold, but they also offer amplified upside when gold prices rise, since higher prices expand mining margins directly.

Join our readers who get Hawkmont Research delivered straight to their inbox.  Independent, conflict-free equity research, no paywall, no compensation from the companies we cover. Hawkmont Research is free and will stay free.

Join 100.000+ readers for free

What This Trade Is Really Priced On

Whether gold at $4,400 is cheap relative to January's $5,600 isn't the relevant question. Whether you believe in the long term shift away from dollar dominance and toward central bank diversification into gold is.

If you do, the current weakness driven by a geopolitical shock is a window, not a warning. If you don't, gold at $4,400 is no more attractive than it was at $5,600.

History suggests central banks will keep diversifying away from the dollar for years to come. History also suggests wars run longer than markets expect, and that rates can stay elevated longer than anyone would like. Both can be true at once.

This is a long term position. Size it, and price it, according to your actual conviction.

---

Disclaimer

This article is for informational and educational purposes only and does not constitute investment, financial, legal, or tax advice. Hawkmont Research is an independent, conflict-free publication. We hold no positions in the securities or ETFs mentioned in this piece, and we accept no compensation from any issuer, fund, or company covered in our research. Nothing here should be construed as a recommendation to buy or sell any security. Markets involve risk, including the risk of loss, and past performance is not indicative of future results. Do your own research and consult a licensed financial advisor before making investment decisions.