Gold, Silver, War, and a Fractured Fed

Key Takeaways

• A record-high number of policy dissents and a leadership transition have created a “coherent policy” vacuum that historically drives investors toward precious metals.  
• Geopolitical conflict in Iran has weaponized energy prices, pushing the PCE index well above the 2% target and leaving the Fed caught between aggressive tightening and economic growth risks.  
• A long-term structural shift is underway as emerging market central banks trade dollar-denominated assets for gold to hedge against deteriorating fiscal conditions in advanced economies.  
• Gold and silver are currently reasserting their roles not just as commodities, but as essential “alternative anchors of value” in an era of institutional uncertainty and fiscal strain. 

The past several months have delivered a peculiar mix of signals for watchers of financial markets. Oil prices have surged amid geopolitical conflict, inflation has reaccelerated, and the Federal Reserve, once a model of carefully choreographed consensus, now appears divided and uncertain. 

Yet gold, long regarded as the market’s geopolitical barometer, initially lagged these developments, even declining during the early stages of the Iran conflict. That divergence is now beginning to close, and the forces driving it point to a potentially volatile period ahead.

To understand where precious metals may be headed, it is necessary to step back and consider the broader macroeconomic setting. The Iran war has disrupted energy markets in a meaningful and arguably historic way. The closure of the Strait of Hormuz, one of the world’s most critical oil chokepoints, has pushed energy prices sharply higher. This has fed directly into inflation data. 

A Central Bank Divided

The Federal Reserve’s preferred measure, the personal consumption expenditures (PCE) index, has moved back into uncomfortable territory, rising at a pace well above the central bank’s 2 percent target. Energy costs have played an outsized role, with gasoline and related spending surging.

This presents policymakers with a dilemma that is both familiar and newly acute. On one hand, higher inflation would typically argue for tighter monetary policy. On the other, the uncertainty created by war – combined with the possibility of slower growth as higher energy costs ripple through the economy – makes aggressive tightening risky. The result has been hesitation, and in more recent development, disagreement between the Fed’s top officials themselves.

Recent Federal Open Market Committee meetings have seen an unusual number of dissents, the highest in decades. Some policymakers favor rate cuts, concerned about threats to economic growth. Others want to remove any hint of easing bias, signaling vigilance by making clear that rate hikes remain on the table. 

This fragmentation matters. Markets rely heavily on central bank guidance to anchor expectations about interest rates, inflation, and financial conditions. When that guidance becomes inconsistent or contested, uncertainty rises; and uncertainty is precisely the environment in which precious metals tend to perform best.

The transition in leadership at the Fed only amplifies this dynamic. Kevin Warsh, confirmed by the Senate to replace Jerome Powell as chair, will inherit not a unified institutional leadership but a fractured one. Powell himself is expected to remain on the Board of Governors for a time, creating an unusual situation in which a former chair continues to participate in policy deliberations. 

This layering of authority, combined with heavy political pressure for rate cuts and a backdrop of rising inflation, complicates the central bank’s task considerably.

For markets, the key issue is not simply who leads the Fed, but whether the institution can present a coherent policy framework. If investors perceive that monetary policy is becoming reactive, inconsistent, or politically manipulated, confidence in the purchasing power of the currency can erode. 

That erosion does not necessarily show up immediately in consumer prices alone; it often manifests first in asset markets – in particular, in the demand for stores of value that exist outside the financial system. This is where gold and silver come into focus. 

The Gold Divergence and Demand Floor

The recent weakness in gold prices during the early phase of the Iran conflict puzzled many observers. However, part of the explanation lies in interest rate expectations. As the war pushed energy prices higher, markets began to anticipate that the Fed might keep rates elevated for longer. Higher real interest rates tend to weigh on gold, which does not pay dividends or otherwise produce income.

But that explanation only goes so far. Beneath the surface, a more durable force has been building: sustained demand from central banks. Over the past two decades – largely since the 2008 global financial crisis – emerging market central banks have steadily increased their gold holdings. 

This trend reflects a gradual reassessment of reserve composition. In the 1990s and early 2000s, a combination of stable geopolitics, strong US public finances, and low inflation made US Treasury securities highly attractive reserve assets. Gold’s share of global reserves declined during that period.

Yet that environment no longer exists in the same form. Geopolitical tensions have intensified, trade relationships have become more contentious, and fiscal conditions in many advanced economies, especially within the United States, have deteriorated. As a result, the rationale for holding large quantities of dollar-denominated assets has weakened at the margin. 

Central banks, particularly in emerging markets, have responded by diversifying incrementally but persistently into gold.

The scale of the shift is significant. Central bank gold purchases over the past 15 to 20 years have more than offset the sales seen in the early 1990s. Gold’s share of global reserves has risen markedly, while the dollar’s share has declined from its early-2000s peak. Importantly, the process appears far from complete. Historical norms suggest that gold’s share of reserves could rise further if current trends continue.

This steady, price-insensitive demand creates a floor under the gold market. It does not prevent volatility – far from it – but it alters the long-term trajectory. When gold sells off in response to rising interest rates or short-term shifts in sentiment, central banks often step in as buyers. 

Silver’s Dual Role

Silver, while sharing some of gold’s monetary characteristics, introduces an additional layer of complexity. It is both a precious metal and an industrial commodity. Demand for silver is tied not only to monetary conditions but also to manufacturing, technology, and energy transitions. 

In a scenario where geopolitical conflict pushes commodity prices higher and disrupts supply chains, silver can benefit from both channels: its role as a store of value and its industrial applications.

At the same time, silver tends to be more volatile than gold. In periods of financial stress, it can initially decline alongside risk assets before recovering as monetary concerns come to the forefront. This dual nature makes silver particularly sensitive to shifts in investor psychology and economic expectations.

Looking ahead, several forces are likely to shape the outlook for gold and silver.

First, fiscal conditions are deteriorating. War spending, combined with already elevated public debt levels, implies continued pressure on government finances. Financing these deficits requires either higher taxes, higher borrowing, or some combination of the two. In practice, it often leads to a reliance on looser monetary policy over time. 

Even if central banks resist in the short term, the longer-term trajectory tends to favor policies that ease the burden of debt. This environment is historically supportive of precious metals.

Second, energy prices remain a key variable. The Iran conflict has already demonstrated how quickly supply disruptions can feed into broader inflation. If oil prices remain elevated, or become more volatile, the inflation outlook will stay uncertain. That uncertainty complicates monetary policy and increases the likelihood of central bank policy errors – another factor that tends to support gold.

Third, the internal dynamics of the Federal Reserve are changing. A divided committee, a new chair, and lingering political pressures create an environment in which policy signals may be increasingly inconsistent. Markets do not require perfection from central banks, but they do require coherence. When that coherence is lacking, investors seek alternative anchors of value.

Finally, the gradual shift in global reserve composition continues. While it is unlikely that the dollar will lose its dominant role in the near term, even marginal changes in central bank behavior can have meaningful effects on gold demand. This is not a short-term trading factor but a structural trend.

Conclusion

Taken together, these forces suggest that the recent breather taken by gold and silver may be less a sign of a fading bull market than a pause within a broader, longer-term adjustment. As gold “catches up” to the realities of higher energy prices, persistent inflation, and institutional uncertainty, price volatility is likely to increase. Silver, with its additional industrial dimension, may exhibit even sharper swings.

For the knowledgeable observer, the key takeaway is not that gold and silver move mechanically with any single variable, but that they respond to the overall coherence – or lack thereof – of the monetary and fiscal system. 

When that system appears stable, predictable, and disciplined, precious metals tend to recede into the background. When it appears strained, conflicted, or uncertain, they reassert their role. The current environment leans toward the latter.

 

About the author: Peter C. Earle, Ph.D, is the Director of Economics and Economic Freedom and a Senior Research Fellow who joined AIER in 2018. He holds a Ph.D in Economics from l’Universite d’Angers, an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.

Prior to joining AIER, Dr. Earle spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area as well as engaging in extensive consulting within the cryptocurrency and gaming sectors. His research focuses on financial markets, monetary policy, macroeconomic forecasting, and problems in economic measurement. He has been quoted by the Wall Street Journal, the Financial Times, Barron’s, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications.

 

Disclaimer: All opinions expressed by the author are the author’s opinions and do not reflect the opinions of Goldco. The author’s opinions are based on the author’s personal experience, education and information the author considers reliable. Goldco does not warrant that the information contained herein is complete or accurate, and it should not be relied upon as such.