Gold is Doing its Job, Just Not the One Investors May Expect

Additional content provided by Brian Booe, Associate Analyst, Research.

Gold’s behavior since the escalation of conflict in the Middle East has been, at first glance, counterintuitive. Periods of geopolitical stress typically push investors toward gold as a safe haven. Instead, gold prices have struggled to gain any sort of consistent traction, even amid one of the most severe global energy disruptions in decades. Understanding why requires stepping back and recognizing that gold does not sit neatly in any one asset category. It actually straddles several as gold simultaneously functions as a commodity, a reserve asset, and a currency surrogate. That overlapping identity is important, because it means the role gold plays in the monetary system is constantly in flux.

Gold Prices Have Struggled to Gain Traction Since the Middle East Conflict Began

Source: LPL Research, Bloomberg 05/05/26
Disclosure: Past performance is no guarantee of future results.

In 2019, gold was officially designated as a Tier 1 asset under global bank capital rules (Basel III). In practical terms, Tier 1 assets are those considered the highest quality for bank capital purposes. These are assets that carry either a zero or minimal risk weight and require little to no additional capital buffer. Cash and top‑rated sovereign bonds have long dominated this category. Gold’s inclusion reflects its treatment as a zero‑credit‑risk asset when held in allocated physical form on balance sheets. That status allows banks and sovereign institutions to count gold at or near full market value for capital adequacy purposes, rather than applying punitive haircuts that previously made it inefficient to hold during periods of stress. Importantly, this classification is about capital resilience, not liquidity per se. Gold still does not function like cash when immediate funding needs arise, especially during market dislocations — and that distinction matters right now.

The closure and effective throttling of the Strait of Hormuz has produced one of the largest energy supply shocks in history. With tanker traffic collapsing and exports curtailed, oil revenue across the Persian Gulf has fallen sharply. For countries that rely on energy exports to generate dollar inflows, this is not merely a growth issue; it is a liquidity problem.

In that environment, gold’s Tier 1 status makes it unusually usable. Not as a store of value, but as a source of dollars. Selling or swapping gold holdings provides immediate access to the currency that still sits atop the global funding hierarchy: the U.S. dollar. This helps explain gold’s unusual price action. Rather than seeing pure safe‑haven flows, we are likely getting official and semi-official supply, as some countries have been forced to monetize gold reserves to bridge revenue gaps created by disrupted oil exports.

We do not have to infer this stress indirectly. In late April 2026, U.S. Treasury Secretary Scott Bessent confirmed that multiple Persian Gulf allies had requested U.S. dollar swap lines to backstop liquidity amid the fallout from the Iran conflict and the restriction of Hormuz traffic. Public discussion has centered on the United Arab Emirates, but officials have been clear that the requests are broader and regional in scope. Swap line requests are not a sign of insolvency; they are a sign of dollar liquidity needs. Historically, when this dynamic emerges, domestic reserve assets, including gold, are often deployed to manage near term funding needs. In those moments, gold can function as less of a hedge and more as a balance sheet resource. That framing is critical. Gold is not failing in its role. It is simply being used.

At some point, a resolution (whether diplomatic or an escalation in hostilities that leads to overwhelming safe haven flows) around the Strait of Hormuz would remove this immediate source of supply overhang currently weighing on prices. But even then, gold’s next path may not be that straightforward. The period following major energy disruptions is typically one of rebuilding rather than diversification. Governments are likely to focus on securing energy supply, rebuilding inventories, and replenishing strategic petroleum reserves. These initiatives require capital, in dollars, and they compete directly with reserve accumulation in non-yielding assets like gold. In that sense, gold could temporarily fall down the priority list.

In the end, gold’s recent behavior is not a failure of the safe‑haven thesis; it is a reminder that funding needs often temporarily take precedence over fear‑driven positioning. When dollars are scarce and revenue is disrupted, even gold can become a source of funding. Until dollar funding pressures ease and energy flows normalize, gold may continue to trade less like a geopolitical hedge and more like a balance sheet asset.