Recent weakness in gold reflects short-term dollar funding pressures rather than a shift in its core drivers, as structural demand from sovereign reserve diversification remains intact while emerging channels such as tokenization expand gold’s global reach and long-term demand base.
- The near-term gold weakness is a petrodollar funding event, where people seek additional dollar liquidity to service inelastic energy demand and debt obligation. The traditional relationship between gold and real interest rates may still exert some pressure on price, although this linkage has weakened significantly since 2022.
- The fundamental drive for gold in recent years has been reserve diversification and debasement trade, led by sovereign demand and is rate-insensitive. The near-term selloff does not change that thesis.
- Tokenized gold represents a new source of demand, where a new distribution channel capable of reaching 5+ billion people in emerging markets, who have strong store-of-value needs.
Two Channels, One Shock
Gold has declined sharply since the U.S.–Iran war triggered an oil price surge, with prices almost erasing year-to-date gains. Two distinct transmission channels explain the move, both originating from the oil shock.
Higher real rates
The real rate is the nominal bond yield minus inflation expectation, and it was once the primary long-run anchor for gold.
The U.S. 10Y nominal bond yield (US10Y) has been on the rise since early March, moving up from 3.96% to 4.39% as a result of the escalating Middle East conflict fueling energy prices and renewed inflation concerns. Similarly, the 10Y breakeven inflation rate has also moved up from 2.25% to 2.38% during this period of time, resulting in the 10Y TIPS (measure of real interest rates) moving up from 1.70% to 2.00%. Gold generates no income, when the risk-free rate rises, the opportunity cost of holding gold rises, and capital rotates out. The mechanism is consistent across cycles.
However, the relationship has weakened since 2022. Gold continued to rise alongside higher real yields during 2022–2025, supported by strong central-bank buying, geopolitical risk hedging demand, and persistent U.S. fiscal deficits.
Petrodollar funding squeeze
While the long-term inverse relationship between gold and real yields still carries some explanatory power, it has materially weakened since 2022. This suggests a second channel is playing a large role in the current gold price decline: a global dollar funding squeeze.
Oil-importing economies, including China, India, Europe, Japan, and South Korea, collectively purchase about 70% of global crude. With oil prices up more than 40%, the dollar cost of the same energy volume has risen sharply. These countries must secure materially more dollars against export revenues and cash flows that adjust slowly. The resulting demand shock for dollars is structurally inelastic: energy imports cannot be deferred, and adding to that is most cross-border liabilities are denominated in dollars with fixed servicing schedules, which still need to be paid on time.
This dynamic creates a temporary dollar shortage, reflected in the surge in the dollar index.
This dynamic extends beyond the national level. Businesses and households also need additional cash flow to cover rising energy costs, with asset liquidation as the most immediate source. Liquid assets, including gold and equities, are sold to raise dollars quickly. Gold’s high liquidity and global ownership make it a preferred source of emergency dollar funding, leading to a broad and rapid selloff.
Tokenized Gold’s Rapid Ascent
The current selloff is a liquidity event, not a fundamental repricing. More critically, even if real rates remain somewhat elevated, the two fundamental driving forces for gold, sovereign debasement hedging and reserve diversification, are rate-insensitive. Global central banks buying gold to reduce dollar exposure are less concerned about the 10Y TIPS yield. Investors buying gold to hedge the currency debasement risk and acting as an anchor in portfolios for store-of-value are not sensitive to short-term price fluctuations either.
And now there is a new catalyst. Store-of-value demand for gold has historically been capped by distribution friction. Physical gold requires custody and logistics, and paper gold, ETFs require a brokerage account and banking access that a large portion of the global population does not have. The total addressable market for gold has been limited by the infrastructure required to access it.
Tokenized gold removes that friction. Anyone with a mobile phone can acquire exposure to physically-backed gold without a bank account, broker, or custodian logistics. The total tokenized gold supply has grown rapidly since late 2025. While the total size remains small at less than 40 tonnes compared to the above-ground gold reserve of approximately 216,265 metric tonnes according to the World Gold Council (2025), the growth rate cannot be neglected. In the past half year, the total supply of tokenized gold has doubled in quantity.
Tether Gold (XAUT) and Paxo Gold (PAXG) have dominated the market with more than 95% combined market share. The duoplay reflects a structural barrier to entry. Launching a digital gold products require issuers to independently build custody relationships, meet compliance and audit framework, and establish redemption logistics.
Recently, the largest global gold associaton World Gold Council announced it is building a shared infrastructure to make digital gold products interoperable, scalable, and easier to launch. The proposed system is organized around three layers. A physical layer would manage sourcing, storage, transport, and redemption of actual gold. A digital layer would handle issuance, ownership records, and product-lifecycle management. Finally, an interface layer would allow issuers to build their own customer-facing experiences on top of the shared stack. Under this model, issuers would compete on user experience, pricing, and distribution, not on custody infrastructure.
Sizing the Potential Market
To estimate the potential market size of tokenized gold, we can use the gold ETF market as a benchmark. Global gold ETF reached 4,025 tonnes as of end-2025, tokenzied gold today sits around 37 tonnes, less than 1% of the ETF size. The growth rate, however, is of a different order entirely: in 2H 2025 alone, the tokenzied gold supply expanded over 100%.
Because tokenzied gold targets new channels, such as retail users in emerging markets, rather than cannibalizing existing gold ETFs, gross token growth translates into incremental physical gold demand.
If the tokenized gold market sustains an 80-100% annual growth rate, cumulative net new physical demand could exceed 240 tonnes in the next five years, making it reach 7% of the current gold ETF market. Under a more moderate assumption of 50% annual growth, incremental demand would fall in the 100-140 tonnes range.
The WGC infrastructure initiative is additive to this trajectory, as the current observed growth has occurred entirely within the existing two issuers. A successful implementation of shared digital gold infrastructure could potentially expand the addressable market further, bringing a more optimistic estimation.
Bottom Line
The near-term gold weakness is a petrodollar funding event, where people seek additional dollar liquidity to service inelastic energy demand and debt obligation. The traditional relationship between gold and real interest rates may still exert some pressure on price, although this linkage has weakened significantly since 2022.
The fundamental drive for gold in recent years has been reserve diversification and debasement trade, led by sovereign demand and is rate-insensitive. The near-term selloff does not change that thesis.
Tokenized gold represents a new source of demand, where a new distribution channel capable of reaching 5+ billion people in emerging markets, who have strong store-of-value needs.
Disclaimer: The information provided herein does not constitute investment advice, financial advice, trading advice, or any other sort of advice, and should not be treated as such. All content set out below is for informational purposes only.
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