TOKYO — Cue the jokes about “SAFE” — the acronym for the People’s Bank of China division entrusted with managing Beijing’s reserves.

The folks at the PBOC’s State Administration of Foreign Exchange are likely having an anxious July. Last month marked the 20th straight month the PBOC added to its reserves. The 15-ton June purchase was its biggest purchase of 2026.

The 20% drop in gold since then wasn’t in the plan for Governor Pan Gongsheng’s team. Nor is it China’s problem alone: Japan and India have been hoarding gold too, making this an Asia-wide plight. That raises two questions as gold trades around US$4,000 an ounce.

First, why is gold plunging when most expected it to keep rallying toward $5,500 or $6,000 an ounce? Instead, it topped out just over $5,600 in January and has slid roughly 27% since.

Second, what will central banks do now? Will the PBOC, Reserve Bank of India and others buy the dip — or sell gold to protect state assets?

Much of gold’s slide defies logic, not least a stubbornly stable US dollar. By rights, the dollar should be losing ground to gold this year: US national debt is nearing $40 trillion, inflation is running 3.5%-4% year-on-year, and Trump’s tariffs and military adventurism are alienating friends and foes alike.

That backdrop made gold’s January rally look rational to many. And it seemed to set the yuan up to capture more global market share. Instead, the opposite happened.

The Iran war is central to this story. The conflict that began on February 28 has been dollar-positive, confounding the bears. Surging oil prices pushed US inflation expectations higher, stiffening the Federal Reserve’s resistance to rate cuts.

That flipped the expected 2026 script: instead of rushing into gold as a safe haven, investors leaned into the petrodollar dynamic. Energy-related worries boosted the currency that oil is priced in, not the metal that normally feeds on fear.

Also, typical oil-gold dynamics aren’t working this time. Normally, oil and gold typically move in tandem during geopolitical shocks, as investors hedge against inflation and market turmoil. The Iran conflict inverted that, benefiting the dollar.

Kevin Warsh’s arrival at Fed headquarters last month accelerated the dollar’s momentum — and unexpectedly so. Warsh so far hasn’t seemed to be the aggressive dove Trump hoped for when he named him to the chairmanship.

With inflation still hot and traders betting the Fed is more likely to hike than cut, real yields remain elevated — a drag on an asset that pays no interest. Layer on heavy exchange-traded fund (ETF) outflows as investors rotate back into tech shares, buying the dip, and gold lost its luster just as it lost its safety bid.

To be sure, the structural case for gold hasn’t disappeared. US debt keeps surging, central banks still want to diversify away from Treasuries, and sanctions risk tied to Russia’s frozen 2022 reserves continues to worry global investors.

The question now is whether the PBOC, RBI, Bank of Japan and other top monetary authorities — having bought into a rally that’s now unwinding faster than expected — treat this drawdown as a buying opportunity consistent with their long-term de-dollarization logic, or as reason to reverse course.

Count officials in Warsaw firmly in the buy-the-dip camp. The National Bank of Poland, the world’s biggest gold holder, has added 82 tons to its reserves so far this year.

“We’ve been consistently buying gold, taking advantage of the recent price drops,” Governor Adam Glapinski told reporters last week.

He added that “this isn’t some kind of race or a purchase made merely for the sake of it. There is a deep sense in the state’s role in ensuring the security of Poland and Poles under all circumstances, including wartime, which of course we’re not expecting.”

Bob Haberkorn, senior market strategist at Stone X Group, noted “there’s some bargain hunting coming in here” after the recent drop, adding that “in the short term, the main driver for gold is the Fed.”

Carsten Minke, head of next-generation research at Julius Baer, agrees: “All that the gold and silver markets care about right now is whether the Federal Reserve will raise interest rates or not. We do not expect the Federal Reserve to raise interest rates, as it is likely that part of the inflationary pressure is temporary.”

Wednesday’s US inflation data may have further muddied the Fed outlook. Consumer prices rose a less-than-expected 3.5% year-on-year in June, down from 4.2% in May — the first decline in the annual rate since January.

The softer reading “gives the Fed breathing room in deciding whether and when to raise interest rates,” said Nationwide chief economist Kathy Bostjancic.

To Moody’s Analytics chief economist Mark Zandi, the report “suggests the worst is over, we’re past the peak and inflation should moderate” from here.  As Zandi noted, “the biggest threat is that things unravel and we’re back to full-blown war with the Strait of Hormuz shut down.”

Goldman Sachs Research, meanwhile, worries that “a serious re-escalation of the conflict would threaten to revive the key upside risk to inflation and raise the odds of rate hikes.”

Testifying before Congress this week, Warsh cautioned against premature celebration. “There might be some that look at this morning’s data and say, ‘Oh, mission accomplished! Everything is swell.’ That is not my view.”

Despite chatter branding him a Trump/MAGA Fed chair, he stressed the Fed has “no tolerance” for the risk of a years-long inflation surge. “If we get policy right — and I can assure you we will — the inflation surge of the last five years will be a thing of the past,” he said.

Saxo Bank strategist Ole Hansen doubts the Fed will hike this year at all, which could support gold in the months ahead. “We hold onto the view that easing inflationary pressures in the coming months may start to change the rate hike narrative,” he said. “Warsh wants to assert his credentials while not upsetting Trump too much.”

Nick Twidale, chief market analyst at AT Global Markets, warned that confusion over oil traffic through the Strait of Hormuz could make for a “volatile” week — one that “could test the glass half full mentality we have seen recently.”

Even so, this is no time for Treasury Secretary Scott Bessent’s team to get cocky about dollar strength. The forces behind the gold surge haven’t gone away — including fears that Trump’s fiscal plans ahead of November’s Congressional elections might unnerve the bond market.

The fiscal fallout from the “One Big Beautiful Bill,” enacted by Trump’s Republicans in July 2025, accelerated Washington’s debt explosion. The Committee for a Responsible Federal Budget calls it the most expensive reconciliation bill in US history, projecting it will add $4.1 trillion to the national debt through 2034 — ballooning to $5.5 trillion if its temporary provisions are made permanent.

That, combined with Trump’s tariff obsessions and military interventions from Venezuela to Iran — and perhaps Cuba next — has governments like China rethinking their reliance on the dollar. So does Trump’s push to curb Fed independence, which could sharply boost government debt yields. If Warsh doesn’t steer the Fed toward rate hikes soon, Trump could turn on his handpicked successor to Jerome Powell.

The broader BRICS bloc — Brazil, Russia, India, China, South Africa — hasn’t been shy about wanting to sideline the dollar, and the push for an alternative could kick into overdrive as Washington turns up the pressure on Brazil in uniquely personal terms.

In 2025, Trump tied the 50% tariff he slapped on President Luiz Inácio Lula da Silva’s economy to what he calls Brazil’s “witch hunt” against former President Jair Bolsonaro, a Trump ally prosecuted over his role in efforts to overturn the 2022 election.

BRICS members read it as one more instance of Washington weaponizing its financial dominance — on top of tariffs and threats to penalize any country that flirts with dollar alternatives.

Of course, the dollar isn’t about to be dethroned overnight, nor is the yuan ready to assume the full burdens of a global reserve currency. Ten years after Xi got serious about yuan internationalization, China’s currency accounts for just 2% of foreign-exchange reserves compared with 57% for the dollar and roughly 20% for the euro.

Yet, paradoxically, the more turmoil Trump kicks up, the more global investors appear to favor the dollar – for now, at least. Suffice to say, though, 2026 is not working out the way gold bulls expected.

Follow William Pesek on X at @WilliamPesek

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