Although tensions between the United States and Iran have been increasing, significant fluctuations in the price of gold and oil can provide insight into how serious the situation has gotten and provide a preview of what the world’s financial markets may do next.
According to John Caruso, senior market strategist at RJO Futures, “gold and oil are two of the most geopolitically sensitive market barometers we have.” As a result, they are the “first places I look when geopolitical risks arise in the Middle East.”
And there’s no doubt that those hazards have been increasing. Iran announced on Thursday that it would soon open a third uranium enrichment facility, despite the fact that nuclear talks with the United States are anticipated to begin on Sunday.
According to the Wall Street Journal, President Donald Trump has stated that he is less certain that a deal with Tehran will be reached and that if talks break down, he may use force against Iran. The U.S. reportedly withdrew diplomatic staff from Iraq and approved the departure of members of the U.S. military family from the Middle East due to concerns that Tehran might retaliate throughout the region. The New York Times reported Wednesday that Israel appears to be planning an attack on Iran’s nuclear sites.
According to Rebecca Babin, senior energy trader and managing director at CIBC Private Wealth in New York, “it’s being taken more seriously by the market – evidenced by the U.S. decision to relocate nonmilitary personnel from the region, which suggests this is more than just rhetorical posturing,” which distinguishes this escalation from previous flare-ups.
“Israel is more emboldened to act unilaterally,” she told MarketWatch. “Unlike in previous years, there’s a real risk that Israel could strike Iran without direct U.S. support if talks collapse.”
According to Babin, the geopolitical risk premium in crude had been “minimal” until lately, when analysts began to reduce [oil] balance estimates under the presumption that Iranian shipments may remain stable and markets had grown “increasingly optimistic that an interim deal would be reached.”
“A delicate situation where even a slight escalation could cause outsized market reactions is created by the low embedded risk premium and high geopolitical uncertainty.” Rebecca Babin, Private Wealth at CIBC
Crude sentiment has remained “deeply bearish,” Babin continued, with many investors shorting the commodity as a “broader play on weakening global demand.” “This combination of low embedded risk premium and high geopolitical uncertainty creates a fragile setup where even modest escalation could cause outsized market reactions.”
In light of this, gold and oil prices have been fluctuating significantly.
According to Dow Jones Market Data, the August gold contract (GCQ25) (GC00) increased $58.70, or 1.8%, to close at $3,402.40 an ounce on Comex on Thursday, approaching the record settlement for a front-month contract of $3,425.30 from April 21.
In contrast, after rising 4.9% on Wednesday, U.S. benchmark West Texas Intermediate crude for July delivery (CLN25) (CL.1) witnessed a slight decline of 11 cents, or 0.2%, to close at $68.04 a barrel on the New York Mercantile Exchange on Thursday. A day after rising 4.3%, the global benchmark Brent crude for August delivery (BRNQ25) (BRN00) fell 41 cents, or 0.6%, to close at $69.36 on ICE Futures Europe.
Oil flows
According to a recent report by Ahmad Assiri, research strategist at Pepperstone, the developments related to Iran were priced in almost instantly in the energy markets, as Brent crude rose Wednesday from its 50-day moving average near $66 a barrel.
According to him, traders are worried about the possibility of interruptions in the oil supply across the Strait of Hormuz. According to the U.S. Energy Information Administration, 20.9 million barrels of crude oil and petroleum liquids were moved through the strait daily in 2023, making it the most significant oil transit chokepoint in the world.
According to Assiri, “the geopolitical premium remains pronounced,” Prices are “undeterred by broader headwinds such as trade tariffs and their dampening effect on global growth, or OPEC+ production increases led by Saudi Arabia, which appears intent on boosting market share,” he added, adding that Brent prices only slightly decreased on Thursday after their Wednesday advance.
“Taken together, these factors signal genuine concern over a potential resurgence of instability in the Middle East,” Assiri stated. “Geopolitical risk has been vaulted back to the forefront after a period of relative easing following earlier positive developments in the region.”
He pointed out that there are two main factors that will determine oil’s future performance.
The “inherently unpredictable geopolitical dynamic, now leveraged as a bargaining chip by the U.S. administration, demands close monitoring since shift in diplomatic posture or regional tensions could alter the supply outlook,” Assiri stated.
Since oil demand seems to be better than expected a month ago, “supported by ongoing signals of global growth and only muted inflationary impact from tariffs,” he said, the economic environment is the second main driver. He noted that tariffs have so far had few direct consequences on inflation, “reducing the odds of a recession scenario relative to prior forecasts,” which supports the ongoing expansion of oil demand that exceeds forecasts.
Overall, the “interplay” between underlying demand strength and geopolitical maneuvering indicates that the dynamics of the oil market will continue to be “prone to swings and traders should factor in the likelihood of volatility tied to shifts in regional risk,” according to Assiri.
“Take flight to safety.”
For gold, it’s a “flight-to-safety trade,” according to Caruso of RJO Futures. Gold and oil prices may rise significantly if “military action [instead of] diplomacy” is taken against Iran.
According to Michael Armbruster, co-founder and managing partner at futures brokerage Altavest, declining Treasury yields BX:TMUBMUSD10Y, a steep decline in the U.S. dollar DXY, and geopolitical fears are all factors that are hurting gold.
However, he cautioned that tensions in the Middle East “come and go quickly, and if that happens again, gold’s spike may be short-lived.”
According to Armbruster, he “would not buy gold just because of Iran.” It is a “nice narrative for gold, but investors are likely to buy at tops if they are chasing headlines,” he said of the Middle East.
He said that Altavest thinks there may be a better time to buy gold in the upcoming weeks because evidence points to a “reflationary environment” in June, where reflation is defined as a resurgence in inflation and growth. According to Armbruster, the company is “simply on the lookout for a dip for our clients to add to their long gold position” and is still positive on the metal in the long run.
According to Caruso, if the U.S.-Iran conflict worsens, “we’ll surely see the risk-off, safe-haven trade in effect.” However, he added he is not currently seeing much of a “risk-off” play in the markets.
