Holding Dollars Instead of Gold in Chaotic Times: Is It Gold’s Twilight or the Dollar’s Last Radiance?

TradingKey - Following the escalation of the U.S.-Iran conflict, according to the typical market reaction during geopolitical instability, gold ( XAUUSD) should have been the primary choice for safe-haven capital. However, after surging to $5,400 per ounce, gold quickly fell back below the $5,000 mark and has since been mostly fluctuating around $5,100. Conversely, the U.S. dollar, which had been weakening, experienced a rally.

This raises the question: Is "cash king" truly the case when trouble hits? Is gold no longer a priority in asset allocation?

In fact, this is not the case. Gold's role has long transcended the limitations of simple safe-haven status; it is becoming a new value anchor for hedging against shifts in the international order and the devaluation of sovereign credit currencies.

The U.S. Dollar Cycle and Geopolitics

If we extend our perspective to a half-century timeframe, we find an intriguing rhythmic resonance between the strength cycles of the U.S. dollar and the eruption of global geopolitical hotspots. This resonance cannot be explained solely by market economic cycles or supply and demand; it resembles a symbiotic relationship on a strategic level.

The first strong cycle for the U.S. dollar began in the late 1970s. During Paul Volcker's tenure at the Federal Reserve, global capital was attracted back to the U.S. through aggressive interest rate hikes.

Almost simultaneously, the U.S. global strategic offensive against the Soviet Union escalated significantly. The proxy war in Afghanistan reached a fever pitch, and the "Star Wars" program pushed Cold War tensions to new heights. As the world was overshadowed by the threat of nuclear war and regional conflict anxiety, this panic amplified the dollar's appeal as a "safe haven," providing psychological support for capital repatriation that far exceeded interest rate policies.

In the 1990s, the "New Economy" boom under the Clinton administration launched the dollar's second upward cycle. The birth of the Euro in 1999 was seen as a potential challenge to dollar hegemony. Just two months later, the Kosovo War broke out. NATO's 78-day airstrike on the Federal Republic of Yugoslavia devastated the European investment climate and exposed the vulnerability of European regional security at the Euro's inception, leading to massive capital flight to the United States.

Following the 2008 subprime mortgage crisis, the third upward cycle of the dollar saw the bond between geopolitics and the dollar cycle become even clearer.

Whenever U.S. economic recovery falters or internal contradictions surface, external geopolitical conflicts often emerge "opportunely." The Obama administration's "Pivot to Asia" strategy created regional tensions; the 2014 Ukraine crisis placed Europe at the forefront of geopolitical confrontation; and the escalation of the Russia-Ukraine conflict in 2022 directly pushed the U.S. Dollar Index to a 20-year high.

The core of this operational logic is that when purely economic means (such as interest rate policy) are insufficient to attract capital back, the U.S. uses its global military superiority to create or escalate regional conflicts, artificially reshaping the global risk landscape.

Panic drives capital out of high-risk regions, while the U.S. dollar, backed by the world's deepest and most liquid financial markets and the implicit security guarantee of military hegemony, becomes the primary safe haven for capital.

This "chaos-reinforced order" model reveals the essence of the dollar's strength cycles; it is not a mere product of a market economy, but the result of the deep integration of military hegemony, geopolitical strategy, and the financial system.

Current events, such as military actions by the U.S. and Israel against Iran and the situation in Venezuela, are contemporary continuations of this logic, constantly stimulating global risk aversion and driving capital toward dollar-denominated assets.

Challenges to the War-Dollar Model

This "war-dollar" symbiotic model, which has operated for half a century, now appears to be facing unprecedented challenges, as the operational logic it has long relied upon is quietly changing.

In the past, wars pushed the dollar higher by activating safe-haven demand, but the unique nature of the current situation in the Strait of Hormuz has broken this logic. As a critical hub for global energy transport, the Strait of Hormuz handles approximately 20% of the world's liquefied natural gas and massive amounts of crude oil ( USOIL) shipping lanes.

After being targeted by Iranian drone strikes, Qatar closed the world's largest LNG export facility, directly leading to a spike in European natural gas prices and a surge in crude oil prices.

The explosion in energy prices quickly translated into inflation expectations. Market analysis suggests that if the conflict persists, a sharp rise in oil prices will directly push up inflation, potentially negating the Federal Reserve's anti-inflation efforts of the past few years.

High inflation will force the Fed to maintain high interest rates, which supports the dollar's exchange rate on the surface but actually stifles economic growth. If oil prices remain above $100 per barrel for an extended period, the U.S. inflation rate could return to over 4%, which would not only exacerbate public discontent but also shake fundamental market confidence in the dollar.

More importantly, global markets are developing a risk tolerance threshold for frequent geopolitical crises, resulting in a diminishing marginal effect on driving capital repatriation.

Furthermore, the U.S. weaponization of geopolitical risk is eroding the credit foundation of the dollar system from its core. This has prompted countries, including traditional U.S. allies, to reassess the systemic risks of relying on a single currency, accelerating the diversification of foreign exchange reserves and the multipolarization of cross-border payment systems. Continuous gold accumulation by central banks is the most direct signal of this shift.

Gold: A Value Anchor in Turbulent Times

As a hard currency spanning millennia, gold's value foundation is firmly rooted in the triple support of non-sovereign credit, natural scarcity, and global consensus, repeatedly proving its status as the "ultimate safe haven" during various global crises. However, in the context of the current global financial landscape, gold is no longer just a simple "safe-haven asset"; it is becoming a value anchor under a new order.

When the old international order faces the risk of collapse and sovereign currency credit devalues due to debt expansion or policy overextension, gold becomes the core tool for hedging against these systemic risks.

Historically, gold's safe-haven value has been validated by numerous crises. In the 1970s, the U.S. plunged into a stagflation crisis with inflation exceeding 14% and the dollar decoupling from gold. Gold prices soared from $35 per ounce to $850, a gain far exceeding inflation, proving its ability to hedge against the collapse of currency credit.

In 2008, the Lehman Brothers bankruptcy triggered a global liquidity crisis. While U.S. stocks plummeted 45%, gold rose against the trend, showing a significant negative correlation of -0.8 with the S&P 500, becoming one of the few profitable assets at the time.

From 2025 to 2026, as U.S. debt exceeds $38 trillion and global de-dollarization accelerates, central banks in many countries have continuously increased their gold holdings. Coupled with other factors, this has directly driven gold to record highs, reflecting a long-term trend in the safe-haven allocation of sovereign assets.

Bridgewater Associates founder Ray Dalio recently reiterated his strong bullish outlook on gold, stating that in the comparison between gold and Bitcoin, gold is the clear winner with an irreplaceable status.

He emphasized, "Everyone should have 5% to 15% of gold in their portfolio." Dalio added, "When disaster strikes, gold serves to diversify risk; when other assets underperform, it often performs better."

He also reminded individuals, companies, and nations alike to examine whether their gold reserves are sufficient, noting that an allocation below 5% could indicate a risk gap.

However, we must also view gold's safe-haven properties dialectically; it is not without risk. During Federal Reserve rate-hike cycles, such as in 1980 and 2022, gold prices experienced drawdowns of up to 65%. The risks of chasing rallies with high leverage should not be ignored.