From Iran to China:What Is Really Driving Gold in the Second Half of 2026?

Jun 24, 2026 - 16:00

EBM NEWSDESK ANALYSIS

Why Inflation, Not Geopolitics, Is Driving Gold

By Rania Gule, Senior Market Analyst at XS.com – MENA

Over the past several months, investors and analysts have largely interpreted gold’s movements through the lens of geopolitical developments, particularly tensions involving Iran and the broader Middle East. While this explanation may appear reasonable at first glance, I believe markets often fall into the trap of overestimating the impact of short-term political events while overlooking the deeper and more sustainable economic forces at work. In my view, geopolitical tensions were not the primary factor driving gold during the recent period. Rather, they served as background noise that distracted attention from the real market drivers from the very beginning—namely inflation, U.S. monetary policy, and the strength of the U.S. dollar.

When we examine gold’s performance during the peak of geopolitical uncertainty, it becomes clear that the yellow metal failed to benefit as much as many expected from rising global risks. On the contrary, gold experienced repeated waves of selling despite persistent political uncertainty. This raises a fundamental question: if geopolitics were truly the dominant driver, why was gold unable to sustain its gains? The answer lies in the fact that investors were focusing on something far more influential—the trajectory of U.S. inflation and the Federal Reserve’s response to it.

From my perspective, the relationship between inflation, interest rates, and the U.S. dollar remains the primary force shaping the global gold market today. As inflationary pressures increase, so do expectations that the Federal Reserve will maintain a more restrictive monetary stance, whether by keeping interest rates elevated for longer or even implementing additional rate hikes if necessary. Such expectations strengthen the U.S. dollar and push real bond yields higher, creating a challenging environment for gold, which offers no yield to investors. Consequently, I believe that any upside surprise in inflation data over the coming months will have a greater impact on gold prices than any isolated geopolitical development.

What further supports this view is how quickly markets have repriced expectations for tighter monetary policy whenever signs of persistent inflation emerge. Within a relatively short period, investor sentiment shifted from anticipating a more accommodative policy stance to reconsidering the likelihood of rate hikes or delayed rate cuts. These rapid changes in Federal Reserve expectations were enough to reignite dollar strength and weaken investor appetite for gold, confirming that monetary policy remains the most influential factor in determining the broader direction of the precious metal.

At the same time, positive developments from Asia—particularly China—cannot be ignored. China recently recorded its highest level of gold imports in nearly two years. In my opinion, these figures carry significant implications because they confirm the resilience of long-term investment demand for gold despite recent price declines. Furthermore, the continued accumulation of gold reserves by the People’s Bank of China reflects a strategic approach that extends beyond short-term price considerations. For this reason, I view Asian demand as one of the most important structural support factors for the gold market over the medium and long term.

However, it is important to distinguish between long-term supportive fundamentals and factors that influence short-term price action. Rising Chinese imports or central bank purchases do not necessarily mean that gold is destined to reach new record highs immediately. Financial markets are driven by a complex combination of investment flows, monetary policy expectations, and global liquidity conditions. At present, the influence of interest rates and the U.S. dollar still appears stronger than physical demand, which helps explain the ongoing selling pressure despite robust Asian demand.

I also believe there is another factor receiving insufficient attention: changing investor behavior toward risk assets. When equity and technology markets enter corrective phases, investors do not always rotate directly into gold as many assume. In certain situations—particularly during periods of intense financial stress—gold itself becomes a source of liquidity. Investors may sell part of their gold holdings to cover losses elsewhere or reduce overall portfolio risk. This helps explain why gold has occasionally declined alongside equities rather than rising as a traditional safe-haven asset.

Based on these dynamics, I believe gold’s outlook for the second half of the year will depend primarily on three key variables. First, the direction of U.S. inflation and whether it remains above target levels. Second, the Federal Reserve’s response to incoming economic data and its willingness to maintain a restrictive policy stance. Third, the ability of Asian demand and central bank purchases to absorb selling pressure originating from global financial markets. Should inflation continue to surprise to the upside, gold may face additional short-term volatility and downside pressure despite strong underlying physical demand.

Ultimately, I believe investors who attribute every move in gold solely to geopolitical developments are missing the bigger picture. Wars and political crises can generate temporary volatility and influence market sentiment, but they rarely alter fundamental economic trends over extended periods. Inflation, interest rates, the U.S. dollar, and global liquidity remain the true forces shaping gold’s medium- and long-term trajectory. For this reason, my current outlook suggests that gold will continue to face pressure from U.S. monetary policy in the near term, while benefiting from strong strategic support provided by central bank purchases and Asian demand. As a result, any significant pullbacks should be viewed as opportunities to rebuild long-term investment positions rather than as the beginning of a structural collapse in the gold market.