Huatai Securities analysis suggests that as the Strait of Hormuz faces its first near-total blockade in history, oil prices have surged 30% within three weeks, positioning energy as the new "gold." Meanwhile, gold has unexpectedly underperformed risk assets. This is attributed to sudden cash flow disruptions in Gulf states, forced sell-offs in emerging markets, and exhausted gold buying interest due to high positions and substantial unrealized gains. While short-term gold prices act as a pressure indicator, the long-term rationale for de-dollarization remains intact, affirming gold's solid value as a portfolio asset.
Since the escalation of Middle East conflicts on February 28, hostilities have continued to intensify, with market pricing of the conflict's duration and impact shifting from "short-term shock" to "mid-term disruption." Typically, gold and precious metals perform well in stagflation environments due to their dual safe-haven and inflation-hedge attributes. However, in this cycle, gold has lagged behind most risk assets. This report examines the logic behind this divergence and its inherent inevitability.
Gold may have become the "canary in the coal mine" for cash flow stress and material shortages affecting Gulf nations, emerging markets, and the global economy. Its short-term trajectory is heavily influenced by Middle East tensions. Nevertheless, over the medium to long term, the allocation value of gold and other scarce resources as hedges against fiat currency credibility remains robust. Additionally, while the U.S.-Israel-Iran conflict boosts near-term risk aversion, it will likely accelerate global capital expenditure expansion and increase consumption of essential materials.
The epicenter of the conflict's impact on the global economy is the Strait of Hormuz. In the three years preceding the conflict, oil prices were on a downtrend, with consensus expectations pointing to prolonged weak supply-demand dynamics. By February 27, forward curves implied an average Brent crude price of around $70 per barrel for 2026. Within three weeks, near-term prices jumped to $92, a gain exceeding 30%. Yet, conflict intensity continues to rise. The Strait—only 33 km wide at its narrowest point—handles approximately 60% of Middle Eastern and 20% of global oil shipments. Even accounting for potential mitigation measures, a blockade would create a hard supply gap of over 10%. The strait is also critical for liquefied natural gas and key chemicals like fertilizers. In early March, the Strait experienced its first near-complete closure, exacerbating physical shortages of global energy and critical materials. It is important to note that the relationship between blockade duration and the degree of material shortages and price increases may be nonlinear.
Three weeks into the conflict, energy has become the new "gold." Although energy serves as the prime example, similar dynamics apply to other physically scarce essential goods. Short-term prospects for reopening the Strait are diminishing. All involved parties are signaling further escalation, threatening not only military targets but also energy infrastructure, potentially prolonging the conflict's impact. Importantly, since the conflict began only recently, many vessels already in transit had cleared the Strait unaffected, and most countries maintain energy and critical material reserves. Thus, some supply buffers exist, but they are depleting rapidly. Extended closure will exponentially increase global shortage pressures. The COVID-19 pandemic demonstrated that physical disruptions to highly globalized logistics can have unpredictable butterfly effects, warranting caution. Energy, with its physical scarcity and inelastic demand, has gained prominence over gold, whose demand is less rigid. The oil-to-gold ratio had reached post-war extremes prior to the conflict, comparable to distortions seen during the 2020 pandemic.
For Gulf states—the conflict's epicenter—which accumulated substantial gold reserves using foreign exchange revenues in recent years, and for developing nations that purchased gold amid de-dollarization and price rallies, cash flow has dried up. Not only is new gold purchasing constrained, but swapping gold—which carries significant unrealized gains—for essential goods at current ratios appears rational. This explains why gold may serve as the "canary in the coal mine" under shortage pressures.
Why has gold (temporarily) lost its luster? Stagflation shocks elevate costs, cause material shortages, compress demand, and squeeze cash flows across market participants. The first step in classic stagflation trading is cash repatriation. Historically, precious metals outperformed during geopolitical crises due to their dual attributes. However, gold is not cash, and its valuation relative to cash and essential physical goods has reached extreme levels. The underlying logic is that prior price surges lifted gold holdings—especially by central banks—to two-decade highs. Amid sharp cash flow tightening, gold faces weak buying interest and potential selling pressure. Recent gold performance is driven by four factors:
Pressure to shift from financial to real assets under shortage shocks. As noted, "cash is king" in stagflation, favoring assets with strong or positive cash flows. Gold lacks cash flow support, particularly after substantial valuation gains and high unrealized profits. Relative to other goods with hard supply gaps, gold has more fully priced geopolitical risks. In the current environment, gold holding stability is weaker compared to scarcer commodities with more certain cash flows.
High positions and large unrealized gains make gold holdings vulnerable to declines. Since 2022, global central bank gold purchases accelerated, drawing private sector participation. Estimates indicate annual central bank gold buying in 2022-2025 doubled the previous decade's average. Coupled with price appreciation, gold's share of central bank reserves rose from 12.8% in 2020 to 24.5% by December 2025. From 2023 to 2025, the gold-to-oil ratio increased 3.1-fold, outperforming most assets. However, with gold not being a "necessity" and marginal buyers—such as Gulf and emerging market states—facing severe cash flow constraints, short-term supply-demand balance turns unfavorable for gold prices.
Disruption to the petrodollar cycle may upset gold's supply-demand equilibrium. Unlike previous energy crises, Gulf states' cash flows are physically severed, potentially turning negative, worsening gold's balance. Historically, oil shortages enhanced Gulf states' pricing power for export commodities. This time, however, the unprecedented Strait blockade and threatened energy infrastructure have slashed Gulf incomes, significantly obstructing the petrodollar cycle. Prolonged conflict could amplify dollar shortage risks, boosting the U.S. dollar beyond safe-haven flows and tightening liquidity. Approximately 60% of Gulf energy exports are blocked. Years of declining oil prices and accelerated domestic infrastructure investment have left little cash flow redundancy. For decades, Gulf states exchanged energy and raw materials for dollars, investing globally. Their net external investment position stands at $2 trillion, with gold being one of the fastest-growing, most profitable (allowing sales without realizing losses), and sharply revalued versus oil assets. Gulf gold reserve values and proportions more than doubled over the past six years. Two unique aspects of this shock—1) physical interruption of Gulf cash flows, and 2) substantial recent gold holdings and gains—make gold prices a "canary in the coal mine" for Gulf economic stress.
Global developing nations—previously major gold buyers—face constraints on new purchases and potential "emergency" selling pressure. Gulf and emerging economies were the primary drivers of central bank gold buying over the past four years. In this shock, emerging markets bear the heaviest burden (excluding few energy exporters). As shown in daily conflict pressure monitors, many developing countries—especially in Southeast Asia, South Asia, Africa, and near the Gulf—are implementing strict demand control policies under cost inflation and currency depreciation pressures. Multiple vulnerabilities and quantitative indicators highlight their plight. If external accounts and fiscal conditions deteriorate persistently, gold purchasing power may decline, with marginal selling pressure emerging. After all, the relative scarcity of gold versus "butter" can shift or temporarily reverse with changing ratios and shortage conditions.
In summary, if hostilities escalate further and the Strait of Hormuz remains blocked, gold buying interest is unlikely to recover near-term, while selling pressure may rise. Therefore, barring decisive damage to Gulf energy and raw material infrastructure, Strait reopening is a precondition for gold price stabilization.
Short-term, the U.S. dollar strengthens; long-term, gold retains allocation value. Over the medium to long term, the U.S.-Israel-Iran conflict will reinforce de-dollarization and fiat currency anchor weakening via: 1) rising global fiscal unsustainability; 2) accelerated erosion of the dollar's reserve status; and 3) higher geopolitical risk premiums. Although gold's share of global central bank reserves has grown rapidly, it remains below 1990s levels. More importantly, both historical post-conflict trends and logical deduction suggest gold's value relative to fiat currencies will appreciate. Conflict costs and reserve needs drive fiscal expansion impulses (e.g., recent U.S. defense proposals for additional $200 billion spending). Amid existing doubts about global fiscal sustainability, conflict exacerbates deficit pressures. Furthermore, as global order restructures and the U.S. retreats from global governance—potentially becoming a source of geopolitical volatility—governments will likely continue reducing dollar assets, supporting reindustrialization and defense autonomy.
Risks include U.S. strikes on Iranian power plants, unexpected Iranian retaliation, further escalation, and extended Strait of Hormuz blockade beyond expectations.