Recent escalation of conflict in the Middle East has sent crude oil prices soaring, yet gold—traditionally a safe-haven asset—has unexpectedly retreated to its lowest level this year, with domestic prices falling below a key threshold. This counterintuitive trend points to a fundamental shift in the nature of geopolitical risks and reflects deeper adjustments in gold’s pricing dynamics.
Past tensions in the region often centered on disruptions to transport routes—such as attacks on oil tankers or blockades of strategic straits—which could be resolved relatively quickly once logistics were restored. This time, however, instability has directly impacted core oil and gas production zones. On March 18, a joint U.S.-Israeli strike targeted Iran’s South Pars gas field, prompting retaliatory missile attacks on Qatar’s Ras Laffan Industrial City, the world’s largest liquefied natural gas export hub, on March 18 and 19. Qatar Energy has indicated that severe damage to facilities may require three to five years for full production recovery, with partial restoration taking months.
More critically, Iran announced on February 28 a tiered control system for transit through the Strait of Hormuz, a narrow channel accounting for roughly 20% of global oil shipments. Measures began implementation in early March, though Iranian authorities clarified on March 22 that the strait remains open to compliant vessels. According to an assessment released on March 23 by IEA Executive Director Fatih Birol, the conflict has severely damaged over 40 energy facilities across nine Middle Eastern countries, with impacts comparable to the combined effects of the 1970s oil crises and the 2022 natural gas shortage. This signals that oil supply disruptions are no longer speculative but physical, potentially creating a structural deficit lasting years.
This shift has fundamentally altered market expectations for inflation and monetary policy. Rising oil prices pose a stagflation risk—simultaneously driving up prices while restraining growth—presenting central banks with a complex challenge. Although the U.S. Federal Reserve held interest rates steady in its latest meeting, it raised inflation projections and scaled back 2024 rate cut expectations from two to one. Markets have even begun pricing in potential rate hikes, increasing the opportunity cost of holding non-yielding gold.
Meanwhile, safe-haven flows have not evenly distributed across assets. Stock markets have experienced sharp swings since the escalation, pressuring highly leveraged positions with margin calls and forced liquidations. In such liquidity-strained environments, gold—with its substantial unrealized gains—becomes an easy source of cash, leading to passive selling. This explains gold’s short-term positive correlation with risk assets: it is not acting as a hedge but as liquidity support for other positions. Additionally, Gulf states—key gold buyers in recent years—face shrinking energy export revenues due to Strait of Hormuz restrictions, strengthening their incentive to sell gold reserves for essential imports and worsening gold’s short-term supply-demand balance.
The adage “gold thrives in turmoil” may be an oversimplification. During the 2008 financial crisis and early 2020 pandemic, gold also fell alongside risk assets when markets prioritized cash over preservation. Gold typically regains momentum only when crises prompt large-scale central bank easing. Similarly, current geopolitical tensions have raised inflation expectations, tightening monetary policy before easing can take effect, leaving gold vulnerable.
Over the longer term, gold’s market structure has amplified recent volatility. While steady central bank buying has provided solid support, it has also attracted speculative capital. Since late 2024, crowded long positions have made gold prone to sharp sell-offs when sentiment shifts, temporarily transferring pricing influence from strategic buyers to speculative traders and aligning gold’s short-term behavior more closely with risk assets.
Nevertheless, the recent decline does not signal an end to gold’s long-term uptrend. On the contrary, heightened geopolitical friction further undermines confidence in the U.S. dollar. As energy supplies become strategic tools and foreign assets face seizure risks, central banks are accelerating efforts to diversify reserves. Non-U.S. central banks’ appetite for gold remains strong, and de-dollarization trends have intensified amid the conflict. Even after hostilities subside, prolonged energy supply uncertainty will reinforce gold’s role as an ultimate store of value.
Investors should distinguish between short-term tactics and long-term strategy. In the near term, gold may remain volatile as it searches for a bottom. Rushing to “buy the dip” is not advisable until clear signals emerge—such as easing inflation or the reopening of the Strait of Hormuz. Existing holders may consider reducing exposure during rebounds to manage risk, while underinvested investors should wait for technical stabilization.
Over the medium to long term, the correction offers an opportunity to accumulate positions gradually. Gold’s core bullish drivers remain intact: persistent geopolitical risks, ongoing reserve diversification by non-U.S. central banks, and concerns over fiat currency stability amid rising global debt. Investors with a multi-year horizon may use periodic or phased buying during downturns to build exposure, targeting long-term value appreciation.
Key indicators to monitor include progress on reopening the Strait of Hormuz, shifts in Fed inflation expectations, and sustainability of Asian gold demand. Until these signals turn decisively, patience and gradual accumulation remain prudent. The recent sell-off does not mark the end of gold’s bull market but represents a meaningful correction within an ongoing uptrend—washing out speculative excess and revealing enduring value.