Gold Drops Despite Oil Surge as Yields and Dollar Weigh Heavily
Gold prices have defied expectations amid geopolitical tensions, falling 23% from their January 2026 peak of $5,405 to around $4,140 by October 2026. Despite the Iran conflict pushing Brent crude above $100 a barrel, gold is headed for a second consecutive weekly decline, down roughly 3.4%. The metal's underperformance can be attributed to elevated 10-year Treasury yields above 5.2% and a stronger dollar, factors that typically make non-yielding assets like gold less attractive.
Axel Merk of Merk Investments argues that oil supply shocks are not inherently bullish for gold. Historical data shows that the metal's performance depends on the policy response to such shocks. For instance, the 1970s oil crisis led to a gold rally due to inflationary policies, while the early 1980s saw a long bear market following Volcker's tightening. Merk emphasizes that the oil price itself is a poor trading signal for gold; instead, the policy mix that follows an oil shock is what matters most.
Current market dynamics highlight the importance of real yields, the dollar, and policy expectations in driving gold prices. With the 10-year Treasury yield hovering around 5.24-5.31% in early October, the opportunity cost of holding gold, an asset that pays no interest, has increased significantly. This has led to a shift in market participants, with speculators trimming their positions while central banks and ETF investors continue to buy. Central banks purchased a record 289 tonnes of gold in Q2 2026, reflecting a focus on reserve diversification and sanctions hedging rather than short-term price views.
Despite the fiscal argument supporting long-term gold ownership as a hedge, there is no evidence of policy changes that would favor a gold standard. Economist Judy Shelton's proposal for gold-linked Treasury Trust Bonds remains unadopted. Merk advises against holding gold in anticipation of such a policy reset, suggesting that typical allocations of 2-10% in diversified portfolios are more practical. Investors must also consider the different risks and benefits of physical gold, ETFs, and miners when sizing their exposure.