War, shocks, and market volatility — generally a perfect storm for. Despite this, prices have fallen. The answer lies not in fear but in the mechanics of global reserve flows.

For years he wrote the story himself. Gold rose and investors sought refuge from a world of financial excess, fiscal recklessness, and an end to the dominance of the dollar. Central banks from Beijing to Riyadh were quietly moving out of US Treasuries and into bullion. The structural bull case for precious metals has never looked stronger.

Then, over a three-week period, the price of gold fell 14 percent. Silver fell even harder — down 28 percent. On the surface, time has no meaning. The world is at war. Oil markets are in shock. Volatility is increasing. Yes, it is strengthening, recovering from multi-year lows. Still, this should be a great time for precious metals. Instead, they are cratering.

The explanation, when it does come into focus, is counterintuitive and clarifying: gold is no longer behaving like a “fear asset.” This reserve flow is behaving like an asset, and right now, those flows are reversing.

A decade of monetary debasement

To understand why gold has been rising over the years, one must first understand the two pillars that made up the bull case. First is the financial meltdown. Since the financial crisis of 2008, and with the boom in the pandemic era, central banks in the developed world have engaged in unprecedented balance sheet expansions. The money supply grew faster than output. The real interest rate turned negative, and inflation finally caught up.

In this environment, hard assets—gold and silver chief among them—offered something that became increasingly rare: a store of value that couldn’t be printed. Investors, institutional and retail alike, poured into precious metals as a hedge against the slow erosion of purchasing power. The logic was simple and compelling: if fiat currencies are being undermined, then your assets are not.

“Gold became a reserve asset of choice, not just a safe haven – a structural shift that changed who was buying and why.”

The second pillar was de-dollarization. The weaponization of the U.S. dollar in 2022—when Washington and Brussels froze Russia’s foreign reserves—sent chills through every surplus nation on Earth. The message was clear: dollar-denominated assets, including Treasuries, could be seized. Couldn’t sleep.

The response was swift and historic. Central banks, particularly in the Global South and the Gulf, began hoarding gold at a pace not seen in decades. Saudi Arabia, the United Arab Emirates, Kuwait and China all became important buyers. This was not a demand for speculation. It was sovereign wealth management — away from dollar dependence and toward an asset that is no one’s liability.

Enter Hormuz Shock.

The Iran conflict, and particularly the blockade of the Strait of Hormuz, has perpetuated this dynamic with brutal efficiency. The strait is the heart of the global oil market, with about 20% of the world’s petroleum passing through it every day. Blockades don’t just increase oil prices. This erodes the income stream of countries that have become the most reliable marginal buyers of gold.

Saudi Arabia, the United Arab Emirates, and Kuwait run their sovereign wealth funds and reserve portfolios on the back of petrodollar surpluses. When oil revenues shrink sharply—as they do when a major shipping artery is disrupted—that surplus narrows or disappears. The result: a casual buyer of gold becomes a non-buyer, or worse, a seller forced to liquidate positions to meet domestic financial obligations.

China adds another complication. The world’s largest oil importer is now facing a significant trade shock. Slower growth means smaller trade surpluses. Smaller surpluses mean slower reserve accumulation, and slower reserve accumulation means less demand for the asset that served as the alternative reserve currency of choice.

Why is silver falling hard?

Silver’s decline has been almost twice as severe as gold’s, and this is due to its dual identity. While gold is primarily a monetary and reserve asset, silver straddles two worlds. About half of all silver demand is industrial — electronics, solar panels, electric vehicles, semiconductors.

When global growth expectations deteriorate sharply, this industrial demand evaporates faster than any financial or safe-haven premium. Silver suffers from both sides simultaneously: weak reserve accumulation and weak industrial demand. The same growth shock that reduced GCC surpluses also slowed manufacturing activity that uses silver.

The geopolitical precious metals paradox

The conventional wisdom—that gold thrives in times of war and geopolitical tension—is not so much wrong as it is incomplete. Gold performs well in a specific type of crisis: one in which investors flee to safety and liquidity flows to the perceived haven of distressed assets. But the Iran conflict is creating a different kind of crisis, one that disrupts the global capital flows that have affected the gold bullion market.

This is the contradiction at the heart of the current initiative. Gold is not reacting to the headlines. This is reacting to balance sheets – specifically, to the weakening of sovereign balance sheets that have been the most prolific buyers of gold. Fear abounds. But fear, in this instance, is not the variable that drives prices.

“In the short term, gold follows liquidity and reserves—not headlines and fear. The structural bull case remains; the marginal buyer has simply stepped in.”

Momentum, Retail, and Chase

Before the controversy reshaped the picture, precious metals had become something else entirely: the trade of speed. The structural narrative of backwardness, dollar shortages, sovereign procurement was real and well established, but it also attracted a second, stirring wave of capital. Retail investors, fueled by months of massive price increases and fueled by social media, ETF influxes, and zero-commission brokerages, piled into gold and silver funds at a pace not seen in years. Gold ETFs recorded their biggest weekly gains on record in the months leading up to the dispute. Silver, with its low price per ounce and high volatility, became a particular favorite among momentum-driven retail traders chasing outside returns.

This is important to understand current sales intensity. When an asset’s price embeds not only structural demand but also a momentum premium—additional bids that come from trend followers and late retail money—the opening is brutal when it comes. As shown on the chart below, the Gold Trust ETF just recorded its biggest monthly outflow since April 2013.

The same investors who bought on the way have stop losses, margin calls, and short attention spans. As prices began to reverse, the momentum crowd exited as quickly as they entered, extending the decline far beyond what fundamentals alone would have dictated. Herms’ shock may have been the trigger, but the fuel for the fire was the foam that accumulated during the rally.

Source: Bloomberg

Outlook

The structural issue is still intact.

None of this invalidates gold’s long-term thesis. The fiscal deficit has not been reversed. De-dollarization is a multi-decade process, not a quarterly trade-off. Central banks will not abandon their gold hoarding strategies because of temporary revenue shortfalls. When the dust settles—oil flows return to normal, China stabilizes, GCC surpluses recover—the structural bid for gold will reassert itself.

But markets don’t trade on multi-decade papers in the short term. They trade based on who is buying and who is selling today. The most important buyers are currently under financial pressure. This, more than any geopolitical narrative, explains why gold is falling in a world designed for it to rise.

For investors, the lesson is sobering and illuminating: understanding how an asset performs over the long term doesn’t always tell you what it will do in the next month. Gold is still money. But even money moves with the tide of global liquidity—and for now, the tide is ebbing.