Gold has been one of the best-performing assets in recent years. However, since the Persian Gulf war has led to closure of the Strait of Hormuz, price of this metal has corrected. The market is flat year-to-date with a downward bias.

 

If anything, the outbreak of the Iran war triggered a period of market stress that saw investors increase their demand for US dollars. This demand pushed the dollar higher, forcing investors to liquidate their most liquid assets such as gold, to meet margin calls and dollar-denominated obligations. In some way, the dollar partially replaced gold as safe haven. 

 

This disrupted the momentum trading that had characterised the gold rally of 2025, triggering significant outflows from gold ETFs (exchange-traded fund) by retail investors. Data show net inflows into gold ETFs have tapered whereas inflows into tech have climbed since March.

 

In reality, retail investors are driving the gold price. Recent performance can be explained by the behaviour of retail investors, not central banks. Central bank buying since 2010 has been the key driver of the structural rise in gold prices. This trend accelerated after Russia’s invasion of Ukraine in 2022, as the freezing of Russian foreign reserves showed that dollar-denominated assets held in Western institutions could be weaponised.

 

In response, emerging market central banks attempted to diversify reserves away from vulnerable US dollar holdings, such as US Treasuries, and towards gold, which cannot be frozen, sanctioned or seized in the same manner.

 

However, when you closely examine the drivers of gold demand over the last year, it is clear that central bank buying has tapered over the past year. Gold prices, on the other hand, continued to rise through February 2026.

 

As such, the 2025 gold price action was actually driven by faster ETF inflows from retail participants, at a previously unseen pace.

 

As the most volatile source of gold demand, ETFs are the marginal buyer in the market. In a market where physical supply is constrained, the marginal buyer sets the price. Buying by speculators, retail investors and trend-followers can drive sharp and self-reinforcing price movements. This is borne out by the fact that ETF demand is the only consistent demand source correlated with gold prices.

 

No wonder, most experts are currently tactically neutral on gold, despite the noise gold bulls are making all the time. Valuations are stretched, speculative net inflows from retail investors have tapered off and higher US bond yields have raised the opportunity cost of holding gold.

 

Retail investors are now the marginal driver of gold prices, as central bank buying has slowed over the past year. Yet the US-Israel war with Iran led to some liquidation of gold positions to fund margin calls, together with a pivot to tech and AI dominated themes.

 

The structurally positive stock-bond correlation means new diversifiers are needed as repeated supply shocks, inflation overshoots and fear of fiat currency debasement continue to be a feature of the 2020s landscape.

 

Clearly, gold’s upside price risk is rather limited in the second half of 2026. If anything a correction below $ 4,000 a troy ounce appears to be a possibility. With raging inflation, there is a possibility the US Federal Reserve may actually hike interest rate, rather than cut it. This situation arrests the upside price risk for the precious metal.

 

Importantly, gold market participants in our country must exercise utmost caution and not get carried away by one-sided bullish narratives. Physical demand has significantly weakened. Signals from New Delhi suggest that the government is planning some major policy intervention to reduce precious foreign exchange outflow on gold, an acknowledged demerit commodity.