Since the outbreak of the US-Iran war, crude oil and gold, two assets highly sensitive to geopolitics, have displayed markedly different price trends. The former has experienced a significant rise, while the latter has seen a slight decline. What explains this divergence?

As a natural form of money, gold serves three primary hedging functions: against geopolitical risk, inflation risk, and US dollar risk. The price of gold is influenced by the interplay of these three forces, causing it to act as a hedge to varying degrees in different periods. Since late 2023, precious metals entered a powerful bull market, with gold surging from $1,800 to over $5,000. This strong upward momentum was driven by gold simultaneously fulfilling its roles as a hedge against geopolitical turmoil, inflation, and dollar risk.

In October 2023, against the backdrop of the Russia-Ukraine war, large-scale conflict erupted between Israel and Hamas, plunging the Middle East into warfare. The Red Sea crisis emerged in 2024, leading to the blockade of the Bab el-Mandeb Strait. With the inauguration of Donald Trump in 2025, the international order became increasingly unstable. These events reflect a chaotic geopolitical landscape, providing substantial support for gold prices.

Conversely, in 2023, the US economy shifted from overheating to stagflation. By 2024, influenced by political factors, the Federal Reserve initiated an interest rate cutting cycle despite unresolved inflation, leading to a resurgence of US dollar liquidity. This environment of monetary easing, coupled with the risk of secondary inflation, meant gold served as a hedge against both dollar weakness and inflation, fueling its price ascent. With all three hedging functions activated, a rise in gold prices was almost inevitable. Furthermore, benefiting from the Fed's easing cycle, both emerging and developed markets, including Chinese and US equities, experienced bull markets.

Regarding oil prices, last year's average price was notably lower than the previous year. This was because after taking office, President Trump persuaded OPEC to significantly increase crude oil production in an attempt to force Russia to make concessions at the negotiating table. This strategy initially showed results, with President Putin showing increased flexibility on peace talks. Had the US-Iran war not occurred, a ceasefire agreement between Russia and Ukraine was anticipated in the first half of this year.

Since the outbreak of the Middle East war, gold and oil prices have experienced repeated fluctuations, with their trends diverging due to distinct underlying causes. For gold, in mid-to-late January, as the probability of a US-Iran conflict increased, gold prices rose, reflecting its geopolitical hedging attribute. The prevailing market expectation at the time was that the conflict would be short-lived, similar to the previous year's "Midnight Hammer" operation, suggesting a temporary market trend.

Following the US "decapitation" strike against Iran, gold prices saw a brief rebound but soon plummeted sharply. This was primarily due to a shift of major capital flows from gold to crude oil. With gold positions overly concentrated beforehand, major funds sold gold to raise liquidity for establishing long positions in oil. Essentially, a "position rotation" from gold to oil caused gold to fall as oil rose.

Additionally, as international markets began pricing in a prolonged US-Iran war, risk assets like US stocks came under pressure, triggering a wave of redemptions. The US financial market faced a liquidity crisis. As one of the most liquid assets after cash, gold was heavily sold off. Therefore, the sell-off in gold in early March was not driven by international investors turning bearish on gold itself, but rather a self-preservation strategy amid a liquidity crisis.

A liquidity crisis alone might have been manageable, often resulting in a "deep V" price pattern for gold, presenting buying opportunities. A more concerning development emerged from mid-March onwards, as international expectations for the US-Iran conflict grew more pessimistic. Concerns extended beyond a potential prolonged blockade of the Strait of Hormuz to include fears of large-scale attacks on energy infrastructure by the warring parties. Such scenarios could keep oil prices elevated for an extended period, dealing a devastating blow to the global economy and potentially causing a collapse of the international order.

In this context, the Federal Reserve might delay its rate-cutting pace or potentially restart a hiking cycle, reminiscent of 2022. Based on these expectations, gold prices experienced a sharp decline, with the extent of the correction breaking recent records. This indicates that while gold's geopolitical hedging function remains relevant, the primary driver behind the current price collapse is the anticipated reversal in Fed monetary policy. Gold's inverse relationship with the US dollar has overshadowed its geopolitical and inflation hedging attributes, becoming the dominant force.

Compared to previous declines, the fundamental driver for gold has changed. It is no longer primarily a liquidity crisis or profit-taking, but rather international concern over potential Fed monetary tightening. This concern is also reflected in risk assets like Chinese and US equities, as turmoil in the broader market inevitably affects all assets.

Since the US-Iran war began, oil prices have also been volatile. This volatility stems from shifting international investor perceptions of the geopolitical situation. After the "decapitation" strike, oil prices climbed steadily, nearing $120 per barrel. However, in early March, following hints from President Trump that the "war would end soon," markets executed a "TACO" trade, anticipating a potential de-escalation with Iran, which led to a roughly 30% plunge in oil prices.

Unlike tariff disputes, control over a geopolitical crisis does not rest solely with President Trump; he cannot easily disengage while the Strait remains blocked. Ultimately, market expectations for oil were corrected, and prices returned to an upward trajectory. Markets can sometimes misprice geopolitical risks, but such pricing discrepancies are not necessarily negative; a drop in oil prices can present buying opportunities for latecomers.

Looking ahead, the trajectories of gold and oil prices will depend on the progression of the US-Iran conflict. If it evolves into a prolonged war similar to the Russia-Ukraine conflict, gold may lack strong appeal in the near term, and focus might shift to the energy sector. However, the situation remains fluid. The US-Iran war could reach a critical inflection point, particularly regarding whether the Strait of Hormuz can be reopened swiftly, a decision heavily influenced by President Trump's choices.