Gold peaked at $2,000 and has dropped dangerously as its bullish engines weaken. Viewed in terms of oil, the yellow metal appears extremely overvalued and exposed to a return to historical averages. Middle Eastern actors may liquidate gold to finance post-conflict reconstruction.
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The remarkable trajectory of gold saw it rise from just under $2,000 on Valentine’s Day 2024 to just under $5,000 today, over two years later. The two-year rally was driven by several factors.
Monetary easing by the Federal Reserve and other central banks since mid-2024 supported prices. Foreign official and private investors increased exposure to gold compared to dollar-denominated assets, seeking diversification and protection against asset seizure in geopolitical disputes.
Concerns rose that Donald Trump could undermine the Fed’s independence and steer policy towards higher inflation. At least two of these engines now appear to be weakening, while gold prices seem extremely stretched – a dangerous combination.
Assessing how gold is positioned for a significant correction involves examining its long-term performance relative to oil and other reserve assets.
Investing in US dollars without interest is not advisable given the Fed’s policy to gradually erode the dollar’s value. Treasury bonds and longer-term Treasury securities have been a better choice, maintaining their value in terms of oil over the past 55 years.
In early 2026, before the Iran war boosted oil prices, Treasury bond performance in terms of oil was relatively stable compared to 1971. If investors had allocated to gold in 1971, returns would have significantly outperformed oil.
The key point is the pronounced trend towards returning to the average when expressed in terms of oil. Historically, positioning for such a return to the mean has paid off.
In the 1970s, gold maintained its value in terms of oil while US Treasury assets underperformed, making them unattractive. After Paul Volcker’s Fed chair appointment in 1980, investors who switched to Treasury assets saw exceptional returns throughout the 1980s.
If these mean-reversion trends with oil persist, gold investors should be concerned.
Gold appears extremely overvalued now, even after the Iran war oil price surge. A possible halving of gold prices while oil remains stable could bring the gold/oil ratio back to a more normal range, albeit above levels from over two years ago.
A disrupted oil market could mark the decline of US imperial dominance, potentially benefiting gold. Aggressive policies by Donald Trump could also drive gold prices higher.
However, a more likely scenario involves Middle Eastern entities needing to liquidate assets to offset revenue losses, potentially including gold. This could affect gold prices negatively during conflicts.
It’s crucial not to assume that conflicts will boost gold prices.
