The gold price tumbled from US$5,390.45 per ounce on 2 March to US$4,263.55 on 23 March before it turned around.
On Thursday, gold is currently trading at US$4,714 per ounce.
If gold is a safe-haven asset, meaning investors typically flock to it in times of strife, why did the war cause a 21% plunge in price?
Specialist global gold and precious metals fund manager, Sprott, provides some insights.
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Why the gold price tanked when the Iran war began
Sprott Managing Partner, Paul Wong, said gold's strong pull back over the first three weeks of March surprised investors.
In an article, the market strategist said:
The decline has occurred against a backdrop that, under traditional frameworks, should have been supportive: elevated geopolitical risk, a major energy shock, rising volatility across asset classes and growing concerns about global growth.
Yet gold has fallen sharply.
Wong explained that the sell-off reflected a rush to liquidity, not a weakening in the drivers of gold's bull run.
We believe the move reflects a broad liquidity-driven selling event, driven by macro reserve-flow dynamics and forced deleveraging across investment portfolios.
In short, gold is being sold because liquidity is being raised, not because its role as a strategic asset has diminished.
Central banks have been diversifying their reserves away from the US dollar and into gold since 2022.
The catalyst for this change was Russia's foreign exchange reserves being frozen after it invaded Ukraine.
Central bank buying was the primary driver behind a 24% surge in the gold price in 2024.
Gold ripped by another 65% in 2025.
Over time, investors noticed gold's ascendancy and started ploughing their own funds into the metal.
The gold price reached an all-time closing high of $5,589.38 per ounce on 28 January.
Economists describe central bank purchasing as a long-term structural change that will support the gold price well into the future.
Disrupted shipping impacted reserve flows
Wong said Gulf Cooperation Council nations are some of the world's largest accumulators of reserves, funded mainly by oil exports.
The effective closure of the Strait of Hormuz halted energy revenues and stalled sovereign gold buying.
Wong points out that gold "does not require outright selling to fall; the loss of incremental buying pressure is sufficient".
When marginal demand falls from very strong to nonexistent, prices adjust sharply even in the absence of any forced selling.
Investors also sold their positions in gold
Wong said investors selling their positions in gold exacerbated the speed and size of the price fall.
The dominant driver here has been degrossing and deleveraging.
Rising volatility across rates, foreign exchanges (FX), equities, and commodities triggered mechanical risk reduction across hedge funds, systematic strategies, commodity trading advisors (CTAs), and leveraged portfolios.
In these environments, selling is rarely gradual.
Positions are cut quickly, correlations rise and liquidity is raised as the primary objective.
Wong said capital "rotated aggressively into the energy complex", drawing investment flows away from gold and other metals.
Lessons of historical gold sell-offs
Wong said structural pressures were building toward renewed monetary support, which is usually a powerful catalyst for the gold price.
In both 2008 and 2020, gold initially sold off sharply during periods of acute financial stress.
In each case, gold was sold not because it failed as a hedge but because it was one of the last remaining sources of liquidity.
Once forced selling ran its course and policy responses followed, gold rallied strongly to all-time highs within months of market lows.
Today's environment shares key features with those episodes: rising cross-asset volatility, tightening financial conditions and growing pressure on the global monetary system.
