Gold Falls Below $4,050: How Does the Waning War Premium and Rate-Hike Expectations Hit Gold Prices Twice?

On July 27, spot gold opened sharply higher with a gap up, at one point rising above the $4,110 per ounce level. The intraday gain briefly reached 1.45%. However, gold failed to hold that level, then traded in a downward oscillation, and ultimately closed up 0.58% at $4,076.8 per ounce. Entering the early Asia session on July 28, gold and silver saw a short-term plunge; spot gold fell back below $4,050 per ounce, with an intraday drop of about 0.65%. As of Beijing time on July 28, gold has fallen below the $4,050 level.

From above $4,110 to the break below $4,050, gold completed a full sequence from the spike up to the pullback in less than 24 hours. Behind this price volatility was a fierce tug-of-war between the fading of geopolitics risk premium and the return of expectations for tighter monetary policy.

Geopolitics cools down: Why did the war premium disappear so quickly?

The gap-up surge in gold on July 27 was directly triggered by news that the United States would suspend military strikes against Iran. In an interview, U.S. President Trump said the decision was made to pause strikes on Iran to give negotiations a chance. The news quickly triggered a chain reaction across global markets: international oil prices plunged sharply, with WTI crude down more than 6% and briefly falling below $84 per barrel; meanwhile, gold and silver jumped higher on an unwind of safe-haven sentiment.

However, the rise in gold did not last. Trump also emphasized that if diplomatic efforts failed, he might order the resumption of military action against Iran. This “ceasefire but don’t put out the fire” stance essentially transformed geopolitical risk from a “certainty shock” into a “low-certainty option”—the market no longer needed to price immediate war risk, but still had to leave room for a premium in case hostilities restart.

More importantly, the collapse in oil prices itself indirectly weighed on gold. Since the Iran-U.S. conflict broke out at the end of February, gold has fallen by more than one-fifth from its all-time high near $5,600 per ounce. The conflict pushed up oil prices, higher oil prices reinforced inflation expectations, and stronger inflation expectations bolstered the rate-hike logic—after the conflict paused, this transmission chain reversed: the drop in oil prices eased inflation worries, which in turn weakened gold’s appeal as an inflation hedge tool.

A stronger dollar and rate-hike expectations: another drag on gold

If geopolitical cooling was the “trigger” for gold’s pullback, then a stronger dollar and rate-hike expectations are the “gravity field” providing continuous pressure.

As of July 28, the U.S. Dollar Index was trading near 101.50, staying at a near one-month high. The core driver behind the dollar’s strength is the continued intensification of market expectations for Federal Reserve rate hikes. Based on data from the CME FedWatch tool, the probability priced for the Fed to raise rates by 25 basis points at the July meeting has risen from 16% a week earlier to about 38%, and the probability of a September hike is as high as 81%.

This sharp shift in rate-hike expectations stems from multiple factors coming together: the Iran-U.S. conflict boosted oil prices to above $100 per barrel, the Trump administration imposed additional tariffs on multiple countries, and the AI investment boom continued to pull demand higher. Although June CPI recorded the largest month-on-month decline since April 2020, within just a few weeks, these three shocks completely reversed the market’s inflation narrative.

For gold, the warming of rate-hike expectations means a one-two punch: on one hand, higher interest-rate expectations lift the dollar, directly pressuring gold prices priced in USD; on the other hand, rate-hike expectations raise the opportunity cost of holding gold, which yields no interest. The precious-metals pullback on July 28 was driven by monetary-policy expectations—part of the capital chose to proactively reduce directional exposure ahead of the FOMC meeting, triggering short-term long position profit-taking and technical sell orders.

Rising real yields: gold’s traditional pricing anchor is tightening

The inverse relationship between gold and real interest rates is one of the most statistically significant macro rules in precious-metal pricing. Based on monthly data from 2003 to 2022, the correlation coefficient between gold prices and the 10-year TIPS yield is as high as -0.88.

Currently, this traditional pricing framework is putting pressure on gold. The 10-year TIPS real yield has risen from about 1.65% in early March to around 2.20%. The bid yield on the $21.0 billion 10-year TIPS auction issued by the U.S. Treasury on July 24 was even higher at 2.438%, the highest since 2008. The sustained rise in real yields implies that the opportunity cost of holding gold is being lifted systematically.

That said, it is worth noting that there are signs of a certain degree of “decoupling” recently between gold and real yields. Even though the 10-year TIPS yield has risen by roughly 40 basis points over the past month, gold has recorded gains of more than 5% over the same period. The resilience gold has shown around the $4,000 level suggests that the explanatory power of the traditional real-yield framework is weakening at the margin. Strategic central bank gold buying, the dollar credit risk premium, and geopolitical disruptions are collectively driving a reconstruction of gold’s pricing logic.

Tug-of-war around the $4,000 mark: What state is gold in?

Since June, gold has been grinding below around $4,000 per ounce. More recently, after bouncing around near $4,000, it has moved into a breakout. The market is currently in a “bottoming phase,” making it more sensitive to bullish signals.

From the fund-flow perspective, positive signals are emerging. As of July 24, global largest gold ETF SPDR Gold Trust held 1,009.298 tons of gold; the fund added a total of 10.28 tons that week. Although on July 27 the holdings were flat versus the prior trading day, the net inflow in the previous week indicates that long-term allocation funds are gradually building positions around $4,000.

However, improved fund flows alone are not enough to drive a trend reversal in gold prices. The key contradiction in the current gold market is the ongoing tug-of-war between geopolitical risks and macro policy expectations. In the short term, the Iran-U.S. situation remains the main line for gold; but in the medium term, whether the rebound can sustain depends on the clarity of the Fed’s policy path.

Ahead of the FOMC meeting: gold faces a directional choice

The Federal Reserve will hold its meeting from July 28 to 29, with the rate decision released at 12:30 a.m. Beijing time on July 30. The meeting has already been described by the market as “the hardest to predict in years.”

Current market pricing shows a 63.7% probability that rates will be kept unchanged in July, and a 36.3% probability of a 25 basis point hike. A 36% hike probability means the market is not treating “stay put” as a sure thing. For gold, different meeting outcomes map to very different paths:

If the Fed holds rates steady but keeps a hawkish stance and preserves a September hike option, gold may see a brief rebound, but the upside would be limited and it could even face the risk of a rally that fades. If the policy statement turns dovish, pushing the dollar and real yields lower, the rebound would have staying power. If the meeting unexpectedly hikes by 25 basis points, gold could fall below the $4,000 per ounce level.

From a technical perspective, on the daily chart gold still maintains a short-term bearish bias. As of July 28, spot gold traded around $4,047, below the 21-day simple moving average of $4,070, and far below the 50-day, 100-day, and 200-day moving averages. The 14-day RSI stands at 44.99, still below the neutral 50 line, indicating that upside momentum remains weak. Near-term support to watch is around $4,050 and $4,020.

Long-term view: structural logic has not disappeared

Despite concentrated short-term headwinds, the structural logic supporting gold’s long-term value has not disappeared. Global government debt and fiscal deficits are at historical highs, the risk of long-term depreciation of fiat currencies remains, and geopolitical conflicts have not fundamentally eased—these underlying factors form the foundation for gold’s long-term allocation value.

The continued, price-insensitive behavior of central banks in buying gold is reshaping gold’s pricing paradigm. Strategic gold buying driven by “de-dollarization” demand is different from speculative demand under the traditional real-yield framework; it is more stable and longer-term in its support for gold prices.

In addition, a Goldman Sachs executive who oversees the hedge fund business believes that gold speculative longs have been flushed out. Combined with the restart of central bank gold buying and the fact that gold has repeatedly found support around $4,000 per ounce, this may be a suitable time to build structural long positions in gold. BlackRock’s global allocation strategy portfolio manager also suggests that investors should not fully liquidate gold based on only a period of adjustment; within a diversified allocation framework, an appropriate gold position should be kept.

Summary

Spot gold surged from $4,110 and then retreated to lose the $4,050 level, reflecting the combined effects of geopolitical risk premium fading and the return of expectations for monetary tightening. The Iran-U.S. conflict’s “ceasefire but not extinguish the fire” reduced the short-term war premium, but preserved uncertainty options. Meanwhile, the Fed’s rate-hike expectations climbed from below 10% two weeks ago to above 36%, pushing the U.S. Dollar Index to a near one-month high and continuing to weigh on gold prices. Real yields have risen to a new high since 2008, further increasing the opportunity cost of holding gold. Before the outcome of the FOMC meeting is revealed, gold is likely to remain range-bound between $4,000 and $4,150. Over the long term, central bank gold buying, fiscal debt expansion, and geopolitical uncertainty still provide underlying support for gold prices.

FAQ

Q1: What are the main reasons gold lost $4,050?

A: Gold fell from $4,110 to lose $4,050, mainly driven by two factors: first, the pause in the Iran-U.S. conflict led to the fading of the geopolitical risk premium, and the crash in oil prices eased inflation concerns; second, the Fed’s July rate-hike expectations rose from about 10% two weeks ago to above 36%, strengthening the U.S. dollar and directly pressuring gold priced in USD.

Q2: How does the Fed’s July meeting affect gold prices?

A: The Fed will hold a meeting on July 28 to 29. If it keeps rates unchanged while retaining a hawkish stance, gold could see a brief rebound but with limited room; if policy turns dovish, gold may gain sustained rebound momentum; if it unexpectedly hikes by 25 basis points, gold could fall below $4,000 per ounce.

Q3: What does the rise in real yields mean for gold?

A: Gold has a strong negative correlation with real interest rates. The 10-year TIPS yield has risen to above 2.2%, the highest since 2008, meaning the opportunity cost of holding gold has risen significantly. However, gold has shown resilience near $4,000 recently, suggesting the explanatory power of the traditional real-yield framework is weakening at the margin.

Q4: Does gold’s long-term allocation value still exist?

A: The structural logic supporting gold’s long-term value has not disappeared—factors such as high global debt and deficits, fiat depreciation risk, and ongoing geopolitical conflicts still remain. Ongoing central bank gold buying is reshaping gold’s pricing paradigm; it is recommended to keep an appropriate gold allocation position within diversified holdings to hedge tail risks.