Gold and Silver Sold Off Despite US-Iran Tensions Easing — When Will the Selloff End and What Will Put the Floor In?

Jimmy Wong

Most investors assumed a major Middle East war would send gold sharply higher. Instead, the opposite happened.

When the United States and Israel launched strikes against Iran, many expected gold to rally. But Iran's response changed the equation. The closure of the Strait of Hormuz sent oil prices sharply higher, triggered fresh inflation fears, and forced markets to reassess the path for interest rates - and that became the key mechanism driving precious metals.

The war did not simply create geopolitical risk. It created an inflation shock. Higher oil prices raised input costs, lifted consumer inflation expectations, strengthened the US dollar, and increased the chance that the Federal Reserve would keep policy tighter for longer. That is why gold fell from around US$5,600 to nearly US$4,100 - not because the structural case for gold had disappeared, but because the war accidentally made the Fed more hawkish.

This week, that headwind finally started to ease. The United States and Iran have signed a framework memorandum of understanding, with the Strait of Hormuz reopening and oil prices falling as markets reassess the inflation outlook. Gold initially rallied to around US$4,336/oz, while silver gained more than 4%, as investors priced in lower energy-driven inflation risk and reduced rate-hike fears.

But the recovery has not been straightforward. Kevin Warsh's first Federal Reserve press conference delivered a cold shower for markets. While rates were held steady, Warsh stressed price stability, refused to offer clear forward guidance, and kept policy firmly data-dependent. Gold and risk assets pulled back after the press conference as investors realised the Fed may remain cautious even as the war begins to wind down.

That push-pull dynamic now defines the market. Goldman Sachs expects Strait of Hormuz flows to return to only around 70% of pre-war levels, which means inflation relief may come slowly - giving the Federal Reserve room to remain cautious, and gold room to consolidate before its next major move.

Yet the deeper structural case remains intact. Central banks continue to buy gold. Sovereign debt concerns remain elevated. De-dollarisation continues to support long-term demand. Major institutional forecasts from Goldman Sachs, JPMorgan, Morgan Stanley and UBS remain bullish for year-end gold prices. The bull market thesis did not break. The war created a detour. That detour may now be ending.

The dominant force this week was the US dollar, surging to a 13-month high after the Fed's hawkish June meeting. With markets now pricing in a 63% chance of a September rate hike and 80% by December, higher real yields sharply increased the opportunity cost of holding non-yielding metals. Thursday's PCE inflation data came in broadly in line with expectations - enough to nudge gold back above US$4,000 into the weekend, but not enough to reverse the week's damage.