When the United States launched new airstrikes on Iran this week, most people watching financial markets expected gold to rise. Gold is supposed to be the safe haven, the thing you own when the world is uncertain. Instead, gold fell more than 1%, dropping from around $414 to $408 per ounce. This surprised many people. It should not have.
Understanding why requires separating two different things that are often confused: the long-term reason to own gold, and what happens to gold's price in the short term when everyone already owns it.
The long-term case for gold rests on a framework developed by economist Charles Gave and his research partners at GaveKal. The framework says gold performs best when two conditions are met simultaneously: real interest rates are negative or falling (meaning the interest you earn on government bonds, after adjusting for inflation, is low or dropping), and the dollar is weakening relative to other currencies. Both conditions have been present for much of 2025 and 2026. The US dollar has been losing ground against other major currencies, and inflation has kept real rates low despite the Federal Reserve's efforts. In this environment, holding gold beats holding cash, because cash loses purchasing power and gold does not.
That framework explains why gold has risen more than 48% over the past year in the Compass portfolio's investment universe. It does not explain why gold fell this week.
The short-term driver is something investors call positioning. When a trade becomes crowded, meaning many people have all bought the same thing for the same reason, the price becomes fragile. Any small catalyst that causes even a fraction of those buyers to sell can overwhelm new demand. The brain notes on gold track this carefully: the call/put ratio on gold options recently reached a 20-year high. An options ratio like this measures whether investors are betting more on prices going up (calls) versus prices going down (puts). When it hits a 20-year extreme, it means retail investors are piling into leveraged bets on gold going higher. That is a contrarian warning signal: when everyone is already positioned for a move, the move has usually already happened.
Gold also had a remarkable run before this week. The price reached above $5,400 earlier this year before correcting about 20%. The current price around $408 per ounce (for the GLD fund that holds physical gold) is coming off an all-time high, not a bottom. Profit-taking is a rational response to that setup, and when Iran news pushes more buyers in, some existing holders see the spike as an opportunity to reduce exposure.
The Compass portfolio still holds gold because the structural thesis has not changed. The dollar is weakening over a multi-year horizon, inflation is above its target and likely to stay elevated due to the oil shock from the Iran conflict (oil prices add inflation to the economy with a 6-12 month delay, and oil is at $97-102 a barrel), and central banks worldwide are buying gold at rates not seen in decades. Charles Gave's Allais rule, named after French Nobel laureate Maurice Allais, says we should switch from gold to long-term government bonds only when US 10-year bond yields cross 5.9%. That level would mean bonds are genuinely earning more than inflation, making them a better store of value than gold. The 10-year yield today is around 4.54%. We are 136 basis points (about 1.36 percentage points) away from that trigger. There is no case for exiting gold yet.
The Preservation portfolio also holds gold for a different reason: diversification. Gold has historically had very low correlation to stock markets, meaning when stocks fall, gold does not usually fall by the same amount. That property makes it a useful tool for a portfolio focused on protecting capital with the smoothest possible ride. The recent weakness in gold is worth watching, but it does not break the diversification argument.
The practical lesson here is about the difference between a thesis and a price signal. A position going down in price is not the same as the thesis being wrong. In this case, gold is correcting after an extraordinary rally, in a week when the broader market is also retreating. The reasons we hold it remain intact. We continue to watch whether the dollar keeps weakening and whether inflation keeps rising. If both continue, gold will find buyers again once the positioning extreme resolves. If the Allais trigger is ever approached, we will rotate. Until then, we hold.