During much of 2025, when US President Donald Trump sparked off his tariff-led trade war, gold prices rose while the dollar weakened. This was to be expected — trade wars create uncertainty, and the yellow metal is favoured when risks are high. Now, there is an actual war happening, complete with missiles hitting gas fields, drones decimating West Asian cities, and crude oil trading north of $100 per barrel and threatening the world economy.And yet, gold — the ultimate safe haven – has slumped 15% to around $4,500 per ounce (oz). At the same time, the US dollar is strengthening on fears that rising energy prices may raise inflation and jettison any interest rate cuts by the Federal Reserve.Back in late January, when gold had hit its record high of $5,600/oz, Swiss investment bank UBS raised its price forecast for the metal to $6,200/oz for the first three quarters of 2025, with $7,200/oz in an upside scenario and $4,600 in a downside scenario.“A hawkish pivot by the Federal Reserve could heighten risks to the downside, while a steep escalation in geopolitical tensions could bring us closer to the upside scenario,” UBS strategists said in a note on January 29.Somehow, the pre-conditions for the upside and downside scenarios have been met together.Gold’s decline did not begin as soon as the US and Israel attacked Iran on February 28. Gold futures actually rose to over $5,400/oz on March 2, up almost 6% from February 26.It was only then that the decline began, first gradually (gold fell below $5,000/oz only on March 18) and then rapidly once it became clear that the conflict wasn’t going to be an in-and-out job and the destruction inflicted on the Gulf energy infrastructure would be felt beyond the short-term.Story continues below this adIt was also around then, on March 18, that the US Federal Reserve left interest rates unchanged at 3.5-3.75%. And while forecasts of the central bank’s rate-setters continued to suggest interest rates might be lowered by 25 basis points (bps) in 2026, the mood has decidedly darkened.On February 26, US markets indicated an 18% chance of the Fed cutting interest rates by 25 bps to 3.25-3.5% at its April 28-29 meeting. One month later, there is a 96% chance of rates being left unchanged. The remaining 4% is in favour of a rate hike.Inflation and interest ratesHigher interest rates diminish the relative appeal of non-yielding assets such as gold. How? The cascading impact set off by the surge in oil prices since the start of the Iran war, primarily due to the closure of the Strait of Hormuz, means the supply of oil globally has been severely disrupted. This has pushed up the price of energy, be it crude oil or natural gas.If energy prices rise, then so will inflation. And while official inflation data for March for most countries, including the US and India, will only be released in the second week of April, there are clear signs that prices have increased at a faster rate.Story continues below this adEarlier this week, S&P Global’s Purchasing Managers’ Index (PMI) survey showed that input costs have risen at the fastest pace in 10 months in March, with selling prices being pushed up the most in more than three-and-a-half years. The PMI surveys for India as well as the European Union also signalled a sharp increase in input and consumer prices.Also Read | Why gold prices have remained subdued in India despite raging West Asian conflictIt is no surprise, then, that hopes of interest rate cuts are being shelved. When that happens, bond yields jump. On March 1, the 10-year US government bond was trading at a yield of 4.05% in the secondary market. On Thursday, it was at 4.33%. In India, the 10-year government bond yield has risen around 20 bps.At the same time, the US dollar has also strengthened – as is being acutely reflected in the rupee’s exchange rate. And a stronger dollar makes assets priced in the US currency – such as gold and silver – more expensive, thereby hurting their demand and prices.The gold rushAnalysts are referring to the above trend as ‘the oil-shock paradox’ – energy inflation driven by oil is boosting the US dollar and shifting the interest rate trajectory. Both, in turn, are impacting assets such as gold that should ideally have been gaining from the oil shock.Story continues below this adBut this is in keeping with historical trends seen during earlier conflicts such as Russia’s invasion of Ukraine in 2022 and previous West Asian conflicts: an initial price rise followed by a decline as investors sought liquidity and invested in alternatives such as energy-linked commodities.Gold’s fall over the last couple of weeks must also be seen in a larger context. After rising more than 30% in 2024, gold began a historic rally in 2025 after Trump took charge of the White House. As uncertainty from his trade war spread, institutional buyers and central banks took refuge in the yellow metal, with retail investors jumping on the bandwagon in the final few months of 2025.After Russia’s invasion of Ukraine in early 2022 and the US government subsequently freezing over $300 billion of Russia’s forex reserves, central banks have looked to diversify their holdings and not rely as heavily on US dollar assets lest they end up in the same position as the Central Bank of Russia. In 2024 and 2025 combined, central banks bought almost 2,000 tonnes of gold.For retail investors, the huge surge in gold purchases in late 2025 was due to the fear of missing out.Story continues below this adIt is in this context that the recent fall should be seen: investors would have booked profits. Some, such as Poland’s central bank — the record buyer of gold among central banks in 2024 as well as 2025 — even suggested selling gold and using their profits to fund their country’s defence, an idea that was quickly nixed. Even at $4,500/oz, the price of gold is up 35% year-on-year and 95% compared to two years ago.So, have the heavy purchases of 2025 and the war dented the safe-haven appeal of gold? It depends on who you ask. What is certain is that these are not normal times.