The sustained rise in gold prices is primarily due to strategic, long-term buying by central banks, not short-term speculation. Goldman Sachs sees significant further upside potential, which is not yet priced in, from large private institutions like pension funds and sovereign wealth funds eventually adding gold as a strategic asset.

Gold's price is rising alongside risk assets and falling during stress events, a reversal of its historical role. This behavior mirrors speculative assets like Bitcoin, suggesting its recent rally is driven by momentum and bandwagon effects, not a fundamental flight from fiat currency debasement.

The Iran crisis prevents Fed rate cuts, boosting the dollar and creating a near-term headwind for gold. However, the same geopolitical instability accelerates the long-term trend of foreign central banks diversifying away from the US dollar, creating a powerful long-term bull case.

Gold's price de-correlated from real yields in 2022-2025 because strong structural demand from central banks and retail investors overshadowed rate-sensitive ETF flows. Recently, as this structural demand has softened, marginal pricing power has reverted to rate-sensitive ETFs, re-establishing the traditional link to yields.

Even if US inflation remains stubbornly high, the US dollar's potential to appreciate is capped by the Federal Reserve's asymmetric reaction function. The Fed is operating under a risk management framework where it is more inclined to ease on economic weakness than to react hawkishly to firm inflation, limiting terminal rate repricing.

Strong underlying drivers for gold—such as U.S. fiscal risks and geopolitical fracturing—remain intact. However, the rally has stalled because investors are currently focused on worries about energy-driven inflation and the Federal Reserve's potential reaction. The market is awaiting macro clarity before resuming its upward trend, indicating a temporary pause, not a reversal.

Typically, gold doesn't perform well during hiking cycles. However, the current environment is different. With inflation expected to rise and a Federal Reserve that appears politically constrained from hiking rates, real rates will fall. This "run it hot" policy creates a perfect storm for gold to appreciate significantly.

With multiple rate hikes priced into the curve, the market has reached peak hawkishness. This creates an asymmetric opportunity where a bet against hikes can win even if the Fed does nothing. A flat policy would lead to a "passive ease" as priced-in hikes are removed from the curve.

Alan Greenspan viewed a rising gold price as a market signal that monetary policy was too loose and interest rates were too low. Today's soaring gold price, viewed through this lens, suggests the Federal Reserve is making a significant policy error by considering rate cuts.