As investors, the main reason many of us hold gold in the portfolio, is to act as a safe haven. When events such as wars, financial crises or calamities arrive, gold acts as a shock absorber, because its prices generally rise when financial assets tumble.
Lately however, gold has been failing in this safe-haven role. Just a day before US-Iran hostilities broke out, gold (24-carat) was ruling at ₹1.6 lakh per 10 gram in India. On war news, it spiked for a single day to ₹1.73 lakh. Thereafter, the journey has been steadily downhill, with prices falling to ₹1.46 lakh by June 19. This is a 16 per cent drop from the peak. In fact, Indian investors have been cushioned by rupee depreciation. Global gold prices have tumbled 22 per cent during this period.
In light of this erratic behaviour, should you continue to hold gold in your portfolio? Can you rely on it as a safe haven? To know this, let’s understand the reasons for the recent gold price decline.
Why gold fell
Gold dons many hats as an asset. Investors own it as a commodity, currency, safe-haven and status symbol, resulting in a dozen factors impacting its prices. The recent price fall though, seems to be due to four factors.
Rising treasury yields
In institutional portfolios, gold competes directly with US treasuries (US government bonds) as a safe-haven choice. Therefore, whenever the yield on US treasuries soars, gold loses a bit of its lustre. And vice-versa.
Just before President Trump embarked on the Iran misadventure, the 10-year US treasury yield had been on a steady decline, falling from 4.8 per cent in January 2025 to below 4 per cent by February 2026. During this time, US bond markets were pricing in a high possibility of rate cuts by the Federal Reserve, on weakening job growth and benign inflation.
However, the start of the Iran war in February prompted bond markets to abruptly change course. With energy prices soaring and global supply chain disruptions, they began pricing in the possibility of Fed rate hikes instead of cuts. This propelled the 10-year yield from below 4 per cent to over 4.5 per cent in May. Higher yields on US treasuries have taken the shine out of gold, sparking the recent fall.
Central bank sales
One of the key drivers of gold demand and price gains in recent years has been steady demand from the central banks of the world. Central banks are the world’s largest hoarders of bullion, owning it as an emergency reserve and a diversifier from the US dollar.
Between 2020 and 2025, central banks added between 208 tonnes and 542 tonnes of gold, annually. However, they tend to add to their holdings when gold prices are low and cut back on purchases at highs. This trend has been playing out lately.
World Gold Council data show that central banks, which bought up about 367 tonnes of gold in Q4 2024 (when prices ruled at $2,600) cut back to about 243 tonnes by Q1 2026 as prices shot up to $4,800 levels.
In addition, during times of war or crises, nations pledge or sell gold reserves to raise emergency lines of credit. WGC data show that in Q1 2026 Turkiye, the Russian Federation and Bulgaria together offloaded about 103 tonnes of gold. Central bank sales of gold usually come to light only well after they are concluded. Therefore, the signalling effect of this for investors is limited.
Ebbing ETF flows
If central banks add cautiously to holdings when gold prices are high, investors do the opposite. Buyers of ETFs (exchange traded funds) flock to gold when recent returns look good and abandon it when losses crop up.
This seems to be playing out now. As global gold prices climbed from about $2,600 in Q4 2024 to $4,100 by Q4 2025, ETF buyers ratcheted up their purchases from 20 tonnes to 174 tonnes. As gold prices have moderated from March 2026, ETFs have seen outflows. When gold prices peaked in January 2026, ETF demand stood at 120 tonnes for the month. This fell 26 tonnes in February, a negative 86 tonnes in March (signalling net outflows), went back to 45 tonnes in April and again a negative 16 tonnes in May.
This is likely to have been a big factor behind the recent weakness in gold prices. Given the momentum-chasing nature of ETF investors, their actions magnify gold price trends during both rallies and falls.
Profit-taking
A final explanation could lie in simple profit-booking.
If the last four months have been forgettable for gold investors, the year before it was stellar. In the year from March 2025 to February 2026, gold saw a breathless 90 per cent rally (from $2,800 to $5,200 levels). This was a super-normal return, because the average annual gains for gold over multiple decades is about 10 per cent.
This out-of-the-blue rally took even gold bugs by surprise. It was likely triggered by Trump tariffs, which had central banks hunting for US treasury alternatives, and the fall in US yields. Therefore, when gold showed signs of topping out in February 2026, investors sitting on super-normal gains were likely tempted to lock into them. As the Iran conflict escalated, stock and bond markets tanked, making gold one of the few assets where hefty gains could still be booked.
Takeaways
With reasons for gold’s peculiar behaviour spelt out, what does it mean for your investments?
Like other asset classes, gold price moves are extremely hard to predict. In fact, gold prices are harder to predict than stocks or bonds because there are no cash flows to arrive at a ‘fair value’ for gold.
Long-term rolling return analysis suggests that for Indian investors, gold manages a 12-13 per cent return if held for five years. This makes gold a good asset class to own, with a potential to deliver equity-like returns.
Though gold has worked as an effective safe haven in past market crashes and wars, it doesn’t work every time. Therefore, hopping on to gold after a major crisis breaks out, is a bad idea.
Market gurus didn’t predict gold’s stellar rally in 2025. Nor did they expect it to drop like a stone during the Iran war. This tells you that, to capitalise on gold returns, you need a constant allocation to it in your portfolio. Given that gold delivers returns in short bursts, your allocation to it can be 10 or 15 per cent of your portfolio, but it cannot match stocks or bonds.
If you’re trying to gauge gold price direction from here, monitor US treasury yields and rate hike expectations. Waning rate hike expectations will be bullish for gold.