Heading towards a gold trap?

In times of war, or other disruptive crises such as pandemics, trade wars, tariff tensions, and geopolitical uncertainty, gold is a trustworthy investment to hedge against negative possibilities. But gold has behaved unevenly, with great volatility, in the past two weeks. It dipped considerably, and then showed a four per cent rise in a day. Even experts are divided about how the bullion prices will move over the next few days or weeks. The fact is that global gold prices are still down by a fifth from the peak in January 2026. As a news website questioned, “Can you still trust gold or… (is it) turning into a trap.”

The entire narrative is now based on peace versus war. If peace initiatives take off, as America claims, gold can move up. If the war continues or escalates, there may be a downward pressure. According to an Indian analyst, “The market is shifting from war panic to peace optimism.” Yet, there is no straightforward story as after the US’ peace statements, Iran attacked Israel and Gulf states. Yet, as the business edit (Our Take) on this page shows, Iran gives conflicting signals, as does America, with the former saying non-hostile vessels can pass through the sensitive and critical Strait of Hormuz, and it got a 15-point peace plan.

So, what are the various sub-plots in the overall gold plot? Apart from the war, the biggest influencer is the US dollar. Over the past few months, the currency has strengthened against most global ones, especially the Asian currencies. Japan and Korea were the worst hit, as was India, with the rupee dipping over Rs 94 to a dollar. During the past weeks, the dollar’s strength has stabilised, although it is still strong. This is because of the so-called safe-haven demand, with America considered the least affected due to the oil and oil-related disruptions as it is a net exporter. Money has flowed towards the dollar, and American treasury bonds, whose yields rose.

Another part of the story is short-covering by traders and speculators. As gold lost sheen since January 2026, and the downward trend escalated in the second week of the war, many took short positions, and expected gold to fall further. The slightly-softer US dollar, and regular peace overtures, despite the denials, raised the possibility of a reversal, which did happen. Short sellers rushed to cover the positions, and book the profits on the table, or reduce their losses, which depended on when they took the positions. Analysts contend that what the short sellers do in the future may pull down prices, or keep them high.

Liquidity dynamics is another factor. Theoretically, and logically, money flows into gold during war times. But in the currency cycle, comments an expert, liquidity is dominant and paramount. As the crisis turned acute, with short-war expectations out the window, investors quickly sold liquid assets like gold to stay in cash. This created a selling spree, spurred by the short positions. Hence, gold is caught between safe-haven trust, and liquidity trap. But this may be a short-term reaction as the currencies take a beating, and keeping money in non-US dollar cash may lead to losses over the next few weeks.

One is not sure what the central banks are doing. They realise that they will need to pump liquidity, or money into the national systems once the war is over. This will be critical to revive the ailing and falling economies. Hence, interest rates will come into focus, especially if growth rates are dented, and inflation soars. In such a scenario, one does not know if the central banks are net buyers of gold, or sellers, or believe in maintaining their asset bases. This data may be out later, but the central banks’ indecisiveness looms in the air.

Of course, estimates about inflation and interest rates influence the prices of gold. If the prices rise, and central banks are forced to hike rates to bring them under control, bond yields will go up. Hence, the treasury bonds will emerge as another safe-haven, apart from the US dollar. Money will flow from other assets, including equities, gold, real estate, and other commodities, into bonds. At the same time, if the war lasts, speculative activity will continue in crude oil and petroproducts. Thus, there will be a tendency to leave gold alone for the moment.

When it comes to India, gold has several connotations. The country’s household reserves, which are estimated at $5 trillion, serve several needs such as “store of value, cultural asset, and emergency liquidity buffer.” Yet, as gold prices have soared since the pandemic, and rose sharply over the past year, Indian gold stepped out of homes, and into finance firms to act as collateral for loans. Gold loans rose, and families used it to raise cash rather than use limited cash to buy gold. Indeed, both the processes happened, which depended on the mindset.

Another subplot is the purchase of gold in the black market. Even those Indians, who wish to accumulate the yellow metal, especially, if they purchased earlier, and saw huge paper profits, are buying from the illegal markets. They believe in paying a bit less to buy uncut gold, without any papers, to save on taxes. They do not mind because the price differential, or profit margins effectively remain the same. If legal gold is INR 100, and uncut is INR 90, the profit will be INR 10 if the former goes up to INR 110, and INR 9-10 as the latter will move to INR 99-100, as it will tag the prices of legal gold. The tax savings help.

Finally, we end up with two narratives about the future plot. In one of the endings, gold is not a structural risk, or a long-term risk, and the yellow metal may reassert in higher prices once the situation stabilises. In the alternative ending, the downward pressure on gold may continue, as consumers grapple with liquidity crises, cash shortages, inflation, lower growth, higher joblessness, and lower salary increments. In such a scenario, gold prices will remain depressed.

Yesterday, by mid-afternoon, gold prices were up, and analysts said that the upside was due to value buying, and attractive entry levels. But investors cannot take it for granted that they will break the January 2026 highs immediately. They cannot discount the possibility of higher prices. Gold is not caught up between trust and trap, but between a must-bust, and clap-trap (not claptrap).