Gold’s Safe Haven Status Remains ‘MIA’ Despite Iran War
Since the Iranian conflict broke out, high oil and low gold prices have been a feature of the financial market’s reaction. The first of these is quite explainable, with crude prices spiking higher in response to the Strait of Hormuz shipping disruptions and attacks on energy infrastructure. But what has been going on with the gold price?
Historically, gold has delivered positive returns during most major conflicts, with average initial price gains of 10-20% in the early stages of wars such as the Gulf War (1990-91), the 2003 Iraq invasion, and Russia's 2022 invasion of Ukraine - underscoring its role as a classic safe-haven asset amid geopolitical uncertainty. But not this time. Since the outbreak of the US-Israel conflict with Iran on February 28, spot gold has fallen sharply by more than 15%, retreating from an initial surge above $5,300 per ounce to trade around the $4,400 level. But why?
Gold’s safe-haven status has effectively gone MIA during this war for two main reasons. First, dollar appreciation and rising Treasury yields have hurt the precious metal from an opportunity-cost standpoint. Second, gold’s normally advantageous liquidity has backfired: highly liquid positions have been aggressively closed to cover heightened volatility and margin calls across riskier assets.
This is why gold has underperformed during the current war relative to its performance during prior conflicts. Gold could yet turn its fortunes around. Central bank buying, which has been a pillar of support for gold during its rise to record highs, has no obvious reason to stop. But a pullback in the Dollar and oil prices would be a welcome development for gold given the recent market dynamics.
Oil prices, while still elevated, have pulled back somewhat on reports that a US peace plan has been floated with Iran, which - combined with Trump’s five-day pause on attacking Iranian military and energy infrastructure - has removed a degree of risk premium from the oil price. WTI is currently trading around $88–$90, having retreated from recent levels near $96–$100. Expect crude to continue reacting to the latest headlines around the conflict, with any progress towards a ceasefire potentially seeing prices pull back toward $80, while failure of the peace plan could see a return to triple-digit oil. Right now, the diplomatic window appears to have opened further, taking some heat out of oil prices.
In FX, the USD continues to ride high, albeit down from its peak since the war commenced. The Dollar Index currently trades around 99.10–99.30, well short of its March peak north of 100.50. Higher US Treasury yields on expectations of a more hawkish Fed in response to higher oil prices have propped up the Dollar. But now we are seeing other currencies such as the euro and Pound starting to play catch-up as central bank expectations pivot from monetary policy easing to tightening. It’s fair to say that the USD has been the main winner in the currency market from this period of elevated oil prices, with inflation fears moving the needle higher on interest rate expectations.
For the rest of the week, sentiment around the Iranian war will likely remain the biggest influence on markets. Oil prices and bond yields are the undisputed gatekeepers of risk sentiment right now. If crude keeps storming higher and 10-year Treasury yields continue their climb, stocks and risk assets will stay pinned down under the double whammy of hotter inflation and pricier borrowing. But any meaningful retreat in oil or yields could flip the script fast, breathing fresh life into equities.
