Posted:July 16, 2026
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Tensions in the Middle East have ramped back up. It appears the U.S.-Iran Memorandum of Understanding (MoU) is on shaky ground. Prior to this week, oil prices had settled down, with WTI Crude dipping into the low $70 range, a comfortable level for global economic growth. With tensions rising, WTI Crude moved above $80. As I argued in March, the global economy benefits when oil trades between $60 and $85 and, I believe, likely still benefits by absorbing a slightly wider band today, perhaps $90-$95.
As the world focuses on the kinetic, energy-in-motion conflict of the Middle East, another battle is brewing for supremacy in our global economy. I’m talking about the “Capital War” that is ongoing between the two superpowers, the United States and China.
The United States is fighting to maintain its U.S. dollar supremacy as the global reserve currency and its role as the primary destination for global capital. This capital funds its massive AI boom, technology equities, and U.S. Treasury debt.
China is fighting to maintain years of consistently high economic growth. After many years of debt buildup and overextension, deflationary pressures, along with a continued correction in its real estate market, place China in a fragile economic situation. China must also maintain its heavily managed currency to preserve global monetary credibility.1
In this article, I’ll discuss two commodities, both contested and used as weapons, that sit at the center of this capital war: oil and gold.
Energy as a Geopolitical Lever
The war in the Middle East caused a severe disruption in global energy markets, weaponizing oil supply as a primary geopolitical lever. China’s oil strategy was clear during the war. They would aggressively buy oil at $65 or below and step away from buying once the price reached around $100. According to analyst Louis Gave, China has effectively become the global price setter for the oil market.2 When oil spiked, China used its strategic petroleum reserves to shore up disruptions. This intervention likely helped prevent the extreme spike some analysts had anticipated, such as oil reaching $200 per barrel or higher. Further, China halted the export of refined products, such as diesel and gasoline.
Just as China leaned heavily on its domestic stockpiles to buffer the global market, the United States executed a similar, massive intervention using its own reserves to artificially suppress prices and prevent a runaway energy crisis. The United States, along with Japan and Europe, drew down its Strategic Petroleum Reserve (SPR). For the U.S., the scale of the intervention was historic; the SPR was effectively halved and drained to its lowest level since 1983.3
Ultimately, this combined global effort, with the U.S. and China both dumping their reserves, succeeded in capping crude oil prices. To understand why Beijing was willing to let the demand for oil cool, it helps to look at what the People’s Bank of China (PBoC) was doing to its own money supply.
The People’s Bank of China (PBoC) Liquidity Squeeze
The PBoC has grown into an institution of staggering financial power, with a balance sheet larger than that of the U.S. Federal Reserve. However, the PBoC is not a normal central bank as it’s not independent like the U.S. Federal Reserve. It remains entirely subordinate to the Chinese Communist Party’s State Council, which gives the state the absolute, unchecked power to dictate monetary policy and rapidly mobilize capital to serve political objectives.4
The PBoC can influence how money flows through its financial system using its many tools to manage liquidity. Three such examples are buying up U.S. dollars by printing and issuing its own currency, using “window guidance” to influence commercial banks’ lending, and managing reserve requirements.
In late February and early March 2026, coinciding directly with the escalation of tensions with Iran, the PBoC aggressively turned off the monetary tap, instituting a “liquidity squeeze” in domestic money markets. The chart below, courtesy of analyst Michael Howell, shows how China reduced domestic liquidity by $442 billion. The solid orange line shows liquidity injections. When the line drops, it means China is reducing money in its financial system, acting as a speed brake in its real economy. Howell asserts China did this deliberately to slow domestic oil demand during the war and amid the closure of the Strait of Hormuz, in concert with the drawdown of the aforementioned strategic reserves.5
Figure 1: PBoC Liquidity Shock
Source: Capital Wars
This liquidity squeeze wasn’t unique to China’s domestic economy; it rippled directly into the global gold market.
Gold
Traditionally, gold has held up well during geopolitical events and wars, as it operates outside the bounds of human trust. However, like any asset class, it’s subject to supply and demand. As seen in Figure 2 below, the gold price dropped by approximately 25% to 30% from its peak, driven by a confluence of tightening monetary policy, forced liquidations, and technical profit-taking.
Figure 2: Spot Gold
Source: TradingView
Here are three reasons for the recent drop in gold prices.
The market has interpreted the appointment of the new U.S. Federal Reserve Chair, Kevin Warsh, as signaling a more “hawkish” view of monetary policy. This means higher real interest rates and less accommodative policies. Since gold is a non-yielding asset, higher real rates and the corresponding strength in the U.S. dollar inherently make holding gold less attractive, applying heavy downward pressure on the metal’s price.
Gold also acts as a primary strategic reserve asset (savings) for global central banks. Because global energy is priced in dollars, spiking oil prices combined with a strong U.S. dollar created a liquidity crisis for energy-importing nations. Central banks in countries like Russia, Turkey, and Gulf oil-importing states were forced to liquidate their gold reserves to acquire the dollars necessary to purchase expensive oil, fund their macroeconomies, and defend their local currencies. In this case, gold served one of its primary purposes as a liquidity insurance policy in times of crisis.
China’s domestic liquidity expansion has become a primary driver of the global gold price. With capital controls in place, Chinese citizens have become major buyers of gold in recent years as real estate prices have tumbled and Chinese stock prices have stagnated. China’s central bank has also been a major buyer of gold over the past decade. As discussed, the PBoC’s liquidity brakes coincided directly with the Iran crisis. Because gold is a world money, the gold price has been tracking alongside monetary expansion in China. As monetary expansion contracted, this has become one reason for gold’s recent drop.
Gold in the Capital War
Even as China stopped pumping money into its monetary system, the PBoC “bought the dip” in gold, adding 40 tonnes of gold (approx. $5 billion) to its coffers in the first half of 2026, as seen in the following chart.
Figure 3: China’s Gold Buying
Source: Jan Nieuwenjuijs
China has a strong need to accumulate gold as a reserve asset to offset its massive monetary expansion. China’s M2 money supply has ballooned to over $50 trillion, more than double that of the U.S. money supply.6 China’s money supply alone accounts for roughly 45% of the total money supply of the G8 Countries and Switzerland. When a country prints so much money, the natural consequence is a weak currency. However, China manipulates its currency by pegging it to the U.S. dollar to keep exports competitive. Thus, China has been debasing its fiat currency, the yuan, against gold. A rising gold price helps offset the high and rising liability of monetary expansion.
Furthermore, central banks around the world continue to buy gold for many of the reasons mentioned in this article. Central banks bought 25% of all the gold mined in 2025, and approximately 28% of all gold mined annually since 2022.7
China’s Gold Strategy
China has spent the last 15 years quietly building the infrastructure to buy commodities using its own currency, but it deliberately does not want the yuan to become a traditional global reserve currency like the U.S. dollar. They are attempting to separate gold’s monetary properties of a store of value and a medium of exchange. Rather than forcing the world to hold yuan as a reserve asset, China uses the yuan strictly as a transactional medium of exchange through offshore clearing banks in places such as London, Switzerland, Dubai, Singapore, Hong Kong, and Shanghai.
For example, when China purchases commodities such as oil from countries like Russia or Saudi Arabia, it pays in yuan. The receiving country may not want to hold yuan as a store of value. Instead, they can use their accumulated yuan to either purchase Chinese-manufactured goods or exchange surplus yuan for gold through offshore clearing banks. China is effectively telling its creditors, “If you have yuan surpluses, change them into gold,” which then allows them to take that physical gold home.
Conclusion
The lesser-known and little-discussed “Capital War” continues between the United States and China. China’s willingness to draw down strategic commodity reserves and drain liquidity from its monetary system was a coordinated response to a single problem: containing oil demand amid acute geopolitical stress without breaking its currency peg. The United States pursued the same end through its own reserves, a reminder that both superpowers now treat energy stability as inseparable from capital markets stability.
Gold’s recent correction was caught up in the sinews of war, with countries reaching for their reserves to shore up oil demand, rather than reflecting its long-term role as a store of value. Central banks continue to accumulate gold through the drawdown, with China leading the way. For investors, oil and gold are likely to keep functioning as pressure points in this broader contest, and a portfolio with exposure to gold, energy equities, and broadly diversified stocks may be better positioned for the volatility ahead.
References
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