Why Gold Is Falling Despite War: the Factors Driving Price Now

Gold has not behaved the way the headlines say it should. Spot gold sat near $4,140 on 5 October 2026, about 23% below its 29 January record of $5,405, while Brent crude traded above $100 a barrel on the back of the Iran conflict.

The metal is heading for a second straight weekly decline, roughly 3.4% lower for the week, with the 10-year Treasury yield above 5.2% and the dollar firm. War and an oil spike were supposed to be gold’s best friends.

The factors affecting gold price are less dramatic than the news cycle and more mechanical. Here is which drivers matter most right now, who is still buying, and how to size exposure without losing sleep.

Why an oil shock can hurt gold instead of helping it

Crisis does not automatically mean a gold rally. Axel Merk of Merk Investments argues that oil supply shocks are not inherently bullish for gold, and that the gains after the 1970s oil crisis and the pandemic came from inflationary policy responses, not from the shocks themselves.

Merk’s point: Because oil shocks are disinflationary and dampen growth, the Iran-war shock is negative for gold absent heavy policy intervention.

Brent traded around $101.60-$102.30 and WTI around $90-$90.60 in early October, easing slightly on rising exports and stock-release plans. Yet gold fell anyway.

The history explains why. The policy mix that followed each shock decided the outcome.

The oil-gold correlation runs through inflation expectations and the policy response to them, which is why the same crude spike can lift gold in one cycle and sink it in another.

Merk watches one signal: whether the oil-bond correlation breaks. It has snapped back with each Middle East flare-up.

For you, this means the oil price itself is a poor trading signal for gold. The policy mix that follows it is what to track.

How real yields, the dollar and policy expectations drive gold

Picture a day when war news is loud, yet gold slips. Reporting links this week’s declines to elevated yields and a stronger dollar, and that pairing is the core of how gold is priced.

The 10-year Treasury yield sat around 5.24-5.31% in early October, with the 30-year near 5.61-5.67%. Gold pays no interest, so it competes with those Treasuries for the same money.

• Real yields (yields after inflation): higher real yields make gold less attractive; lower ones help it.
• The dollar: gold is priced in dollars, so a stronger dollar makes it costlier for foreign buyers and tends to weigh on the price.
• Policy expectations: shifts in expected Fed moves feed straight into real yields, and so into gold.

Oil, geopolitics and sentiment work through these three, not around them.

Why opportunity cost matters more at 5% yields

Hold one ounce at about $4,140 and it earns nothing. Put the same money in a Treasury and you lock in a yield above 5%, paid by the U.S. government.

Opportunity cost is what you give up by choosing one asset over another. At 5% yields, that forgone income is large.

This tells you that when yields and the dollar rise together, gold can fall even in a frightening news cycle, and you should expect that rather than be surprised by it. If real yields stay high and the dollar stays firm, headwinds could persist despite fiscal and geopolitical risks.

Who is still buying gold as speculators step back

The price weakness is a change in who owns the market, not a collapse in demand. Merk sorts buyers into gold bugs, diversification buyers, speculators and central banks.

The buyers who left

Speculators entered with leverage in spring 2026 and withdrew when volatility rose, according to Merk. Commodity Futures Trading Commission (CFTC) data for COMEX gold on 29 September shows managed money net long about 120,318 contracts, down about 7,071 week over week, against open interest of 406,456.

Retail has been modest too. Merk notes wholesalers were not ordering from mints last summer as retail sold coins.

The buyers who stayed

Central banks bought a record 289 tonnes in Q2 2026, and full-year forecasts centre around 850 tonnes. Global gold ETFs took in about $18 billion in August, lifting holdings to a record 4,189 tonnes, with year-to-date inflows near $29 billion.

Record central bank gold buying reflects reserve diversification and sanctions risk rather than short-term price views, which explains why official demand has held firm while speculative positioning has been trimmed.

Custody is part of the story. De Nederlandsche Bank moved about 86 tonnes from North America to London between March and August 2026, a sign of how central banks now think about control. Merk also sees generalist fund investors turning up at mid-size miner meetings.

The buyers who remain are less likely to sell on volatility, which helps you judge how durable the demand base is.

Fiscal strain, high yields and the doubt over gold-linked Treasuries

The fiscal case is what keeps long-term holders in. Merk considers current fiscal policy unsustainable and says bond markets are the only thing politicians heed. He adds that tariffs reduce the dollars flowing abroad, cutting foreign bond purchases and pushing long-term yields up.

Then comes the dramatic fix. Economist Judy Shelton, an outside advocate for the idea, proposed “Treasury Trust Bonds” in October 2024.

What Shelton’s proposal would actually do

Holders would choose the dollar face value or a set quantity of gold at maturity, with U.S. gold reserves acting as collateral. A later outline describes a 50-year bond issued 4 July 2026, maturing 4 July 2076.

The differential: U.S. gold of roughly 261 million ounces is carried at a statutory book value of $42.22 an ounce, far below the market price of about $4,140. Shelton calls the gap a “windfall.”

It remains a proposal. There is no evidence of adoption by Treasury or the Fed. Merk expects Treasury to resist an instrument that would rival Treasuries as a risk-free asset.

The mainstream counter-case is substantial:

• Treasury markets remain deep and liquid.
• Gold-convertible obligations could complicate monetary policy and debt management.
• Past gold-standard episodes brought severe constraints and crises when pegs had to be defended.

For you, the fiscal argument supports owning gold as a hedge over years. It does not justify betting on a policy reset, and Merk advises against holding gold in the hope of a return to a gold standard.

Sizing gold and miners: a practical framework for the current setup

Typical allocations run 2-10% of a diversified portfolio. Balanced investors often use 2-5%, while up to about 10% suits those more concerned about debasement or geopolitical risk.

Miners are a different animal. They are operating businesses with leverage to gold, and their margins are sensitive to energy, labour and regulatory costs, so an oil shock can squeeze them even if gold rises.

The choice among ways to buy gold matters as much as the allocation size, because bullion, ETFs and miners carry different costs, liquidity and drawdown profiles that you should weigh before committing capital.

Merk holds physical gold and miners until fiscal sanity returns in Washington. He also contrasts today with 2011, when software dominated near the gold peak; AI margins are uncertain now, while miners have strong margins.

A three-step check turns that into a decision:

1. Set a range, such as 2-5% for a balanced portfolio.
2. Split it between bullion and miners, with the smaller slice in miners.
3. Apply the sleep test: if gold causes sleepless nights, the holding is too large.

Position size, not timing, is the lever you control, and miners need a smaller slice because they amplify drawdowns. Risks remain: further speculator liquidation, persistently high real yields with a firm dollar, and forced selling if an AI or tech bubble bursts. This is general education, not individualised advice.

What holds up, what doesn’t, and the signals to watch next

Policy mix and real yields set gold’s direction. The buyer base decides how much weakness the market can absorb.

Three variables will tell you which way the balance is tilting:

• Whether the oil-bond correlation breaks.
• The next CFTC managed-money readings and central bank purchase data.
• The path of Treasury yields and the dollar.

Check your position size against those signals before you react to the next headline.

This article is for informational purposes only and should not be considered financial advice. Investors should conduct their own research and consult with financial professionals before making investment decisions. Past performance does not guarantee future results, and these statements are speculative and subject to change based on market developments.