Geopolitical risks boost gold most under loose financial conditions
Geopolitical risks increase gold returns substantially more when global financial conditions are loose, according to a Bank for International Settlements study. Analyzing data from 1990 to 2026, researchers found the strongest safe haven impact during the 2024–2026 period.
The liquidity channel drives rebalancing
Using monthly data from 1990 to 2026, the study demonstrates that both geopolitical threats and realized events increase gold returns.
This safe-haven response is significantly stronger during periods of loose financial conditions than during restrictive regimes.
The authors separate geopolitical shocks from general financial uncertainty to isolate safe-haven behavior from conventional flight-to-quality dynamics.
When examining transmission channels, empirical evidence strongly supports the credit and liquidity risk channel over the opportunity cost channel.
This indicates that investors' balance sheet capacity to rebalance assets serves as the primary driver of gold price surges.
A breakdown in traditional correlations
Historically, geopolitical shocks have coincided with tightening financial conditions, which dampened portfolio reallocation.
However, data between 2024 and 2026 showed an unusual decoupling, with accommodative financial conditions persisting alongside escalating geopolitical friction.
The study notes that this specific combination created the largest historical safe-haven response in gold, as available liquidity allowed market participants to execute rapid portfolio reallocation into precious metals.
Liquidity matters more than fear
The paper convincingly dismantles the notion that raw geopolitical fear alone drives gold rallies.
Without loose credit and ample liquidity, investors simply lack the capacity to execute safe-haven rebalancing.
Financial conditions, not conflict headlines, ultimately dictate the strength of gold demand.