Wars, oil and debt: why does gold no longer protect as it once did?

There is something apparently illogical in what is happening on financial markets. Geopolitical tensions show no sign of easing, oil is once again worrying investors, public debt keeps rising, and France finds itself grappling with a financial and political crisis that brings back memories of the most difficult moments in the eurozone’s recent history. Yet just as uncertainty increases, gold is losing ground.

On 23 October 2026, the precious metal came close to the $4,000-an-ounce threshold, posting a weekly decline of about 3.6%. According to data reported by Business People, this is the worst performance in the past four months. It is a move that is especially surprising for those who see gold as an almost automatic protection against crises. If risks increase, the thinking goes, investors should buy bullion and push prices higher. But financial markets rarely follow such simple patterns.

Gold’s decline tells a more complex story, one in which inflation, interest rates, the dollar and liquidity needs are taking on at least as much weight as geopolitical tensions. And the question is not only why the metal is falling, but whether it can really continue to play the protective role that many investors assign to it.

To understand the correction, one must begin with a fundamental principle: gold does not react solely to fear. Its price also depends on the opportunity cost of holding it. Unlike a bond, it pays no interest. Unlike a stock, it pays no dividend. The return for those who buy it depends essentially on changes in its price.

When investors fear a financial crisis or a loss of confidence in currencies, this feature can become an advantage. Gold is not the debt of a state and does not depend on a company’s ability to generate profits. But when inflation expectations rise and the market begins to discount higher interest rates, the picture changes. A government bond offering attractive yields can become more competitive than an asset that produces no cash flow. And if bond yields rise, the price of gold can fall even in the presence of wars, trade tensions and political instability.

This is precisely the paradox investors need to understand: a rise in geopolitical risk does not guarantee a rally in gold, especially when those risks fuel inflation and push bond yields higher. The market, in fact, does not look only at the immediate danger, but mainly tries to anticipate the economic and monetary consequences of what may happen.

Among the main factors weighing on prices is the energy market. Tensions in the Middle East, including Houthi attacks in Saudi Arabia reported in the press, have fuelled fears of possible disruptions to oil supplies. When the security of energy routes is called into question, the issue is not just the price of gasoline.

Energy is a fundamental cost for transporting goods, industrial production, agriculture and many services. A prolonged rise in oil prices can therefore gradually feed through into consumer prices, slowing the disinflation process. This is where the link with the Federal Reserve comes in. If oil were to remain expensive, the US central bank could have less room to cut rates. Investors would then be forced to revise their expectations for monetary policy, while Treasury yields could remain elevated.

The result would potentially be unfavourable for gold. The Federal Reserve meeting on 27 and 28 October therefore becomes an important appointment for understanding the market’s next moves. The prospect of a pause on rates, together with new inflation data, could influence the valuations of numerous financial assets.

Of course, pricier oil and higher rates do not automatically imply a decline in gold. If tensions were to escalate into a financial crisis or a loss of confidence in the monetary system, demand for safe-haven assets could once again prevail. But in the short term, investors face a clash between two forces: fear fuels the demand for protection, while inflation and high yields reduce its appeal.

There is also another element, often underestimated by less experienced investors: in periods of intense financial stress, it is not always only the riskier assets that are sold. Sometimes what is sold is simply what can be liquidated quickly. When uncertainty and volatility rise, some operators have to reduce leverage, cover losses on other positions or find liquidity to meet margin calls. In these circumstances, they may be forced to sell even assets considered defensive.

Gold is not immune to this mechanism. If the dollar strengthens at the same time as US yields rise, the metal can come under further pressure. Since it is quoted mainly in dollars, it becomes more expensive for buyers using other currencies, while US investors may find income-generating assets more attractive.

This does not mean that gold has lost its historical function. Rather, it means that its ability to protect capital also depends on the environment in which the crisis occurs. In some market phases it can offset losses in equities. In others it can fall alongside other assets, at least temporarily. For those investing with a long-term horizon, this distinction is essential: protection does not necessarily mean avoiding any loss, but reducing the overall risk of the portfolio through instruments that react differently to economic shocks.

While gold is correcting, another source of uncertainty is coming from Europe. France, the eurozone’s second-largest economy, is going through a particularly delicate phase. High public debt, the deficit, weak growth and political instability are testing investor confidence.

The yield on the French 10-year bond has moved above 5% this week, while the spread versus the German 10-year Bund has widened beyond 170 basis points, reaching levels not seen since the early 2010s European sovereign debt crisis. The cost of insurance against French default has also risen.

The figure should be interpreted carefully. A widening spread does not mean that France is on the verge of declaring bankruptcy, nor does it prove that a new euro crisis is inevitable. It does, however, indicate that the market is demanding a higher premium to take on the risk associated with French debt.

The problem is that higher yields can gradually make it more expensive to refinance public debt, aggravating precisely the difficulties that led investors to demand higher interest in the first place. A vicious circle is created: greater concern about public finances, rising yields, increasing financing costs and further pressure on state budgets.

The risk of contagion to other European countries cannot be ruled out, especially if tensions were to spread to banking markets and corporate financing. However, there are important differences compared with the past. European banks are generally stronger than in the early years of the eurozone crisis, and institutions have tools to counter financial fragmentation. The situation in France, therefore, is not automatically a repeat of the 2011-2012 crisis.

The fact remains that an environment marked by high debt, rising yields and political uncertainty can profoundly alter investor behaviour. And the consequences do not necessarily stop at France’s borders.

This is precisely where the most important question arises for anyone building a diversified portfolio. Many investors buy gold convinced that it can offset equity losses during any crisis. But that expectation may be too ambitious.

Gold can offer valuable diversification against certain scenarios: loss of confidence in currencies, geopolitical instability, central bank buying and fears over the sustainability of public debt. It is not, however, a universal hedge against every form of risk.

In an inflationary crisis accompanied by high rates, for example, it may suffer even as equities and bonds go through a difficult phase. In a liquidity crisis it may be sold to raise cash. And after a strong rally, it may undergo a significant correction without all the structural reasons for holding it having disappeared.

There is also a price issue. An investment may be sound over the long term and still prove disappointing if bought at elevated valuations. Those who bought gold near historic highs do not have the same experience as those who owned it before the rally. The difference between theoretical protection and effective protection also depends on the entry price, the weight of gold in the portfolio and the length of time the investment can be held.

For this reason, diversification should not be based on the search for a single asset capable of solving every problem. Global equities, quality bonds with maturities aligned to the investor’s goals, cash and an eventual allocation to gold can each serve different functions. No combination guarantees the absence of losses, but spreading capital across instruments with different characteristics can reduce dependence on a single economic scenario.

True protection, then, does not necessarily consist in identifying the asset that rises in every crisis. It consists in building a portfolio that can withstand periods when forecasts prove wrong.

Gold’s slide toward $4,000 now raises a question that the market will have to answer in the coming weeks. If oil continues to rise, inflation remains stubborn and the Federal Reserve maintains a restrictive monetary policy, the metal could face new difficulties. High yields and a strong dollar would pose further obstacles, especially after the run-up that preceded the correction.

If, on the other hand, energy tensions were to ease, rate expectations were to become more favourable again and concerns about public debt were to increase, gold could recover part of the lost ground. Structural demand from central banks and the search for diversification away from traditional financial assets remain factors to watch, but they do not prevent prices from falling in the short term.

That is precisely the point: one must not confuse a long-term trend with market behaviour over a few weeks. Gold can continue to be an important part of risk management without necessarily rising in every crisis. And a correction alone does not prove that its role is over.

The real test will come if geopolitical tensions, the energy crisis and debt fears intensify at the same time. If gold also loses value as the world becomes more unstable, has its role as a safe haven truly disappeared, or is the market simply reminding investors that no protection is free and no asset is immune to a crisis?

The answer may be less reassuring than many would like: there is no investment that protects against everything. There is only a portfolio built so as not to depend on a single forecast.