# Gold and Silver Underperform Amid Rapidly Escalating Geopolitical Risks

The current backdrop includes Iran conflict, Strait of Hormuz blockade, and rising market volatility. By conventional logic, this should be an ideal environment for gold. However, when examining the factors truly driving gold currently, this performance actually makes sense.

The real turning point occurred after 2022 when the US and Europe froze Russian foreign exchange reserves. Over the past few decades, surplus countries typically allocated excess savings to dollar assets, primarily US Treasuries. The freeze event, combined with clear signals from the US government that it no longer encourages foreign countries to continuously allocate surpluses in American financial assets, forced these nations to reconsider how they store their reserves.

At the same time, these countries did not change their economic structures that generate excess savings—these funds still needed to find an outlet. Consequently, gold and silver gradually became the most natural neutral reserve assets.

This explains why gold began to decouple from its three traditional drivers: real interest rates, volatility, and liquidity. Today, capital flows originating from countries' reserve allocations truly dominate gold prices.

This shift brings about a consequence overlooked by most investors.

If gold is primarily driven by reserve flows from surplus countries, then its characteristics have shifted from a safe-haven asset to a pro-cyclical asset. Reserve growth depends on export revenues, trade surpluses, and economic growth in relevant economies. When global economic conditions are favorable and surplus countries' exports are robust, excess savings increase, reserve expansion accelerates, and gold naturally benefits. Conversely, when surpluses come under pressure, this support weakens or even reverses.

The Strait of Hormuz blockade is a textbook example.

Gulf states are major reserve holders and gold buyers, but their export revenues are now severely impacted. To maintain fiscal spending, they will likely need to draw down portions of their reserves, and gold happens to be one of the most liquid assets. Even if actual selling is not yet evident, markets already anticipate that their reserve accumulation will slow or even turn into net outflows. The capital flows that previously formed an important source of demand have, at least in the short term, been interrupted.

Simultaneously, this shock transmits to other surplus economies through energy prices. China, as the world's largest oil importer, will face slower growth and contracting surpluses, which will weaken its reserve accumulation capacity. This pressure will also spread to Asian economies like South Korea and Japan.

In other words, the core chain that previously supported gold's rise—surplus countries generating excess savings and seeking allocation outside the dollar system—is being disrupted. Under the old framework, this event should have been a clear positive for gold.

This does not mean gold's long-term logic has been destroyed. The dollar-dominated system continues to erode, surplus countries still need reserve assets as alternatives to US Treasuries, and gold remains the most direct choice. However, it can be foreseen that within this structural trend, gold price volatility will increase significantly, and its fluctuation rhythm will depend much more on global growth and surplus changes than on traditional interest rate or safe-haven logic.

When surpluses expand, gold rises. When surpluses contract, gold pulls back. Even when the contraction is caused by rising geopolitical risks, which should have driven gold prices higher under the old logic.