Gold Needs a Bigger Risk-Off Shock to Shine Amid Middle East Tensions, Says Julius Baer

The precious metals market finds itself at an interesting crossroads. While geopolitical tensions in the Middle East continue to escalate, gold hasn’t responded the way many investors expected. According to Carsten Menke, head of next generation research at Julius Baer, a more marked risk-off move in financial markets amid the Middle East tensions will be required for gold to truly shine.

So what’s holding the yellow metal back? Let’s break it down.

The Dollar and Bond Yields Are Stealing Gold’s Thunder

Gold prices have been struggling, and the culprit isn’t hard to find. A rebounding U.S. dollar and rising U.S. bond yields have put significant pressure on the precious metal. This is a classic dynamic — when the dollar strengthens and yields climb, gold tends to lose its appeal because it doesn’t offer any yield of its own.

What makes the current situation particularly painful for gold bulls is the context behind the previous rally. As Menke pointed out in a recent email to clients, the earlier surge in gold prices was largely built on the narrative of a debasement trade against the greenback. In other words, many investors piled into gold betting that the U.S. dollar would weaken over time due to factors like:

• Massive government spending and fiscal deficits
• Accommodative monetary policy expectations
• Concerns about long-term inflation eroding the dollar’s purchasing power

That narrative was compelling for a while. But the market had other plans.

The Debasement Trade Backfired

Here’s where things get uncomfortable for a lot of precious metals investors. Those who bet on gold and silver expecting to benefit from a debasement of the U.S. dollar found themselves caught on the wrong side of the trade since the start of the war.

Instead of weakening, the dollar actually strengthened. U.S. bond yields moved higher. And the very foundation that had supported gold’s previous rally — the weakening dollar story — started to crumble.

This is an important lesson in market dynamics. Geopolitical crises don’t always play out the way textbooks suggest. While gold is traditionally seen as a safe haven during times of conflict, the reality is far more nuanced. The dollar itself often acts as a safe haven, and when both the dollar and gold are competing for that role, the dollar can sometimes win out — especially when yields are rising and making dollar-denominated assets more attractive.

Why Gold Hasn’t Fully Capitalized on Middle East Tensions

You might be wondering: shouldn’t war and instability automatically send gold prices soaring? Not necessarily.

For gold to truly benefit from geopolitical turmoil, the fear and uncertainty need to reach a level that triggers a broad-based risk-off move across financial markets. We’re talking about the kind of environment where:

• Equity markets sell off sharply
• Investors flee to traditional safe havens en masse
• Credit spreads widen significantly
• Volatility spikes across asset classes

So far, while the Middle East situation is certainly concerning, financial markets haven’t experienced the kind of widespread panic that would drive a sustained flight to gold. Stocks have remained relatively resilient, and the broader market hasn’t fully shifted into crisis mode.

That’s exactly what Menke is getting at. The current level of tension, while serious, hasn’t been enough to override the headwinds from a stronger dollar and higher yields. Gold needs a bigger catalyst — a genuine, market-wide rush to safety — to break free from these constraints.

Julius Baer’s Current Stance on Precious Metals

Despite the short-term challenges, Julius Baer isn’t turning bearish on gold. The Swiss private bank maintains its established views of being constructive on gold and neutral on silver.

Constructive on Gold

Being “constructive” means Julius Baer still sees a positive outlook for gold over the medium to longer term. The fundamental reasons to own gold haven’t disappeared:

• Central bank buying remains robust, with many countries diversifying their reserves away from the dollar
• Geopolitical uncertainty continues to simmer, even if it hasn’t boiled over into a full-blown market crisis yet
• Inflation concerns haven’t fully faded, and gold remains a popular hedge against purchasing power erosion
• Potential rate cuts down the road could eventually weaken the dollar and lower yields, removing current headwinds

The message is clear: the long-term case for gold is intact, even if the short-term picture is messy.

Neutral on Silver

Silver, meanwhile, gets a more muted assessment. This makes sense given silver’s dual nature as both a precious metal and an industrial commodity. While silver tends to follow gold’s lead during risk-off episodes, its industrial demand component makes it more sensitive to economic growth expectations. In an uncertain macro environment, that additional layer of complexity warrants a more cautious stance.

What Should Investors Watch For?

If you’re holding gold or considering adding it to your portfolio, here are a few things to keep an eye on:

1. The U.S. Dollar Index (DXY)
A reversal in dollar strength would be one of the most powerful tailwinds for gold. Watch for any shifts in Federal Reserve policy expectations that could weaken the greenback.

2. U.S. Treasury Yields
Falling yields, particularly real yields (adjusted for inflation), historically correlate with rising gold prices. Any dovish pivot from the Fed could trigger this.

3. Escalation in the Middle East
If the conflict broadens or intensifies to a point where energy markets are severely disrupted and global economic growth is threatened, that could be the risk-off trigger gold needs.

4. Equity Market Volatility
A sharp correction in stock markets would likely drive capital toward safe havens, including gold. Keep an eye on the VIX and broader market sentiment indicators.

5. Central Bank Activity
Continued strong buying from central banks — particularly in China, India, and other emerging markets — provides a structural floor for gold prices.

The Bigger Picture

The current market environment is a reminder that investing in gold isn’t always straightforward. It’s not enough to simply buy gold because there’s a war happening somewhere in the world. The interplay between currencies, bond yields, investor positioning, and broader market sentiment all matter enormously.

Carsten Menke’s analysis from Julius Baer highlights a crucial point: gold’s performance depends not just on the existence of risk, but on how markets collectively respond to that risk. Until we see a genuine, broad-based flight to safety, gold may continue to face headwinds from the stronger dollar and higher yields.

That said, the constructive longer-term outlook remains valid. Gold has endured every market cycle, every crisis, and every shift in monetary policy for thousands of years. The current challenges are real, but they’re also likely temporary.

Final Thoughts

For patient investors, the current pullback in gold might actually represent an opportunity rather than a reason to panic. If Julius Baer is right and the constructive case for gold still holds, then periods of weakness driven by short-term dollar strength and rising yields could be attractive entry points.

The key takeaway? Don’t chase gold based on headlines alone. Understand the broader macro forces at play, stay patient, and remember that gold’s role in a diversified portfolio extends far beyond any single geopolitical event. When the next true risk-off shock arrives — and history suggests it eventually will — gold will be ready to shine.