Oil Spikes, Gold Hesitates: Markets React to Strait of Hormuz Risk

INN: In an email commentary, you noted that safe-haven demand and a rising dollar are having a push-and-pull effect on gold prices. Could you elaborate on this?

Ernesto Di Giacomo (EDG): Gold is currently caught between two opposing forces.

On one hand, geopolitical tensions and global uncertainty are increasing demand for traditional safe-haven assets, which naturally supports gold prices. Investors often turn to gold during periods of instability because it is perceived as a store of value that is less exposed to political or financial shocks.

On the other hand, the US dollar has been strengthening, which tends to put downward pressure on gold. Since gold is priced in dollars, a stronger dollar makes the metal more expensive for investors holding other currencies, potentially reducing demand. What we are seeing right now is a tug-of-war between these two dynamics: safe-haven flows pushing gold higher, and dollar strength limiting the magnitude of those gains.

INN: Oil and gold prices are often correlated through inflation, risk and economic volatility. How would you characterize their performances lately?

EDG: Recently, both markets have been reacting strongly to geopolitical developments, particularly in the Middle East. Oil prices have been volatile amid concerns about potential supply disruptions, particularly along key shipping routes such as the Strait of Hormuz. This volatility has also fed into broader inflation expectations.

Gold, meanwhile, has been moving in a more complex way. While geopolitical tensions normally support gold, investors are also focusing on monetary policy and the path of interest rates. So although oil has been climbing amid supply concerns, gold has not always followed immediately, as higher energy prices can reinforce inflation fears, which in turn may lead central banks to keep interest rates higher for longer.

INN: Gold is typically one of the first assets investors turn to during geopolitical crises, yet we’re seeing it struggle to gain momentum during the current Middle East conflict. What’s different about this moment compared with previous periods of geopolitical stress?

EDG: What makes this moment somewhat different is the macroeconomic backdrop.

In previous geopolitical crises, gold often rallied strongly because interest rates were relatively low and the opportunity cost of holding gold was limited. Today, the environment is different. US Treasury yields remain elevated, and the Federal Reserve is still cautious about cutting rates too quickly.

When yields are high, investors can obtain attractive returns from fixed-income assets, thereby reducing the appeal of holding non-yielding assets like gold.

So while geopolitical risks are supporting demand for safe havens, the broader monetary environment is preventing gold from rallying as aggressively as it might have in the past.

INN: You point out that a stronger dollar and rising treasury yields are weighing on gold. Can you explain how that relationship works and why those factors can sometimes outweigh gold’s traditional safe-haven appeal?

EDG: The relationship largely comes down to opportunity cost and currency dynamics. Gold does not generate interest or dividends, so when treasury yields rise, investors have an alternative asset that offers a return with relatively low risk. This makes bonds more attractive compared with holding gold.

At the same time, a stronger dollar tends to put pressure on commodities that are priced in dollars. When the dollar appreciates, international investors need more of their local currency to buy the same ounce of gold.

As a result, global demand can soften. When both factors, higher yields and a stronger dollar, occur simultaneously, they can sometimes overshadow the traditional safe-haven demand that gold typically receives during times of geopolitical uncertainty.

INN: Oil prices are rising again amid concerns about potential disruptions in the Strait of Hormuz. How closely are gold markets watching energy prices right now, and could sustained higher oil prices change the outlook for precious metals?

EDG: Energy prices are extremely important for the precious metals market because they influence inflation expectations. If oil prices rise significantly and remain elevated, it can feed into higher transportation and production costs across the global economy. That dynamic often translates into broader inflationary pressure.

In that scenario, gold could benefit because it is widely viewed as a hedge against inflation. However, there is also a second layer to consider. If rising oil prices keep inflation elevated, central banks might delay interest rate cuts or even maintain restrictive monetary policy for longer. In the short term, that could limit gold’s upside. Over the medium term, though, persistent inflation risks could eventually strengthen the bullish case for precious metals.

INN: Investors are watching key US inflation indicators like the consumer price index (CPI) and the personal consumption expenditures (PCE) price index. How critical are these data points in shaping expectations for interest rate cuts and, by extension, the direction of gold prices?

EDG: These indicators are extremely important because they directly influence expectations about Federal Reserve policy. The CPI and the PCE index provide insight into whether inflation is moving sustainably toward the Fed’s target.

If inflation data shows that price pressures are easing, markets could increase their expectations for rate cuts. In that environment, gold would benefit from lower interest rates, which reduce the opportunity cost of holding the metal. Conversely, if inflation remains stubbornly high, the Federal Reserve may keep rates elevated for longer, which could continue to weigh on gold in the near term.