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Core Thesis
The adage 'gold in troubled times' holds, yet since the outbreak of the Middle East conflict and the blockade of the Strait of Hormuz, the 'safe-haven asset' gold has underperformed typical 'risk assets.' However, it fell in sync with equity assets last week due to concerns over broad market liquidity. The gold allocation strategy, seen as flexible for 2022-25, has, following the US-Israel-Iran conflict, become an asset class that neither provides a safe haven nor seems to offer returns—what has changed in the underlying logic, and when will the headwinds for gold prices end? While we have been structurally bullish on gold since 2023, after the US-Israel-Iran conflict erupted, we clearly highlighted short-term risks for gold prices. This article reviews the causal link between the strait blockade and the drop in gold prices and updates the recent interest rate trends and their further impact on gold. In the short term, liquidity headwinds under multiple pressures still need to be digested, but in the medium to long term, the logic of declining fiat currency credibility and the dollar's safety premium remains unchanged. After the Strait of Hormuz enters a phased reopening process, gold, other precious metals, and even industrial raw materials still hold significant allocation value.
Revisiting the 'Oil to Gold' Logic: Why a Short-Term Energy Shortfall Reversed Gold Supply and Demand?
The reversal in the relative allocation status of gold and oil is fundamentally determined by changes in supply and demand. The saying 'when the cannons roar, gold is worth ten thousand taels' runs counter to the current reality, highlighting the importance of analyzing specific supply-demand changes under each shock. On one hand, although gold's allocation value has structurally increased amid the long-term trend of declining global fiscal sustainability, gold demand had already experienced a rapid release phase, forming a market 'strong consensus' of sorts. As central banks and the private sector significantly increased gold purchases and prices were quickly revalued, we estimate that gold's share in central bank assets, calculated at market prices, has risen from 11.8% before the Russia-Ukraine conflict in 2022 to 24.5% by the end of 2025. On the other hand, as the strait blockade prolongs, pressure from global material shortages continues to rise. Energy, with its physical scarcity and relatively 'inelastic' demand, sees its value further highlighted compared to gold with less inelastic demand, especially as the oil-to-gold ratio reached a post-war extreme before this conflict.
Gold becoming the 'canary in the coal mine' under this shortage shock has more specific reasons—whether for oil-exporting countries with damaged infrastructure in the Gulf or for net oil-importing countries, cash flows have tightened, yet these countries were precisely the largest marginal gold buyers besides China and Russia. When cash flows tighten, gold, which had significant unrealized gains, became a preferred asset for sovereign wealth funds to reduce. As shown, emerging market economies, including Gulf nations, have been the main force behind global central bank gold purchases over the past four years.
Approximately 60% of energy exports from Gulf countries are hindered, with potential fiscal revenue declines possibly reaching 30-50%. In 2024, oil revenue accounted for 60-90% of fiscal revenue for major oil-producing countries in the Gulf region. Simultaneously, in recent years, Gulf nations have focused on promoting economic diversification, making substantial other investments, including about $5 trillion in sovereign wealth funds, particularly portions invested in domestic infrastructure. These countries face pressure from significant declines in infrastructure asset valuations and expected cash flows, alongside increased wartime subsidies and fiscal expenditures, leading to tight cash flows. It is reasonable that their capacity to buy gold has decreased and/or the marginal pressure to sell gold has increased.
On the other hand, net oil-importing countries face reduced purchasing power, increased fiscal expenditures, and currency depreciation, significantly lowering the actual payment capacity of net importers reliant on Gulf energy. As international energy prices surge sharply and supply is constrained, developing countries are forced to increase energy subsidies but may simultaneously face slowing fiscal revenue and intensified fiscal pressure, with India and Turkey being typical examples. India faces a 'triple whammy' of tighter trade terms, currency depreciation, and rising interest rates, with both its balance of payments and fiscal pressures increasing noticeably. Under the dual pressure of the 'energy bill' and 'currency depreciation,' Turkey was forced to sell gold reserves to obtain US dollars.
Rigid Energy Price Increases Squeeze Liquidity and Aggregate Demand, Pressuring Prices of Precious Metals and Other Industrial Raw Materials
Rigid energy price increases squeeze aggregate demand and tighten liquidity, putting downward pressure on the prices of other industrial raw materials, including precious metals. Since the US-Israel-Iran conflict, Brent crude oil prices quickly rose to nearly $120 per barrel before retreating somewhat, still about 30% higher than pre-conflict levels. However, as 'delayed demand' will raise the medium-term oil price center, even with a gradual resumption of strait navigation, high oil prices will persist for some time. High oil prices cause a leftward shift in the supply curve, exerting a stagflation-like effect on the global economy and dragging down demand for global industrial raw materials. We estimate that a 3-4 month strait blockade could reduce global growth this year by 0.6-0.8 percentage points. After the US-Israel-Iran conflict, the global manufacturing PMI index showed volatile trends, indicating a hindered recovery in global manufacturing. Simultaneously, high oil prices push up inflation expectations, causing the market to shift its expectation for Federal Reserve rate cuts to hikes, driving dollar strength and rising US Treasury yields, indicating a tightening of global liquidity.
Due to relatively downward revisions in demand expectations (outside of AI), the overall performance of commodities is under pressure. Historical experience shows that during energy crises, except for crude oil and some energy substitutes, other commodity prices typically fall as demand declines and liquidity tightens, such as copper and iron ore prices trending downward. Similarly, although AI-related demand remains resilient in this shock, demand expectations outside AI have been significantly revised downward, leading to overall pressure on the prices of major industrial raw materials, including precious metals.
Recent Accelerated Rate Rises Intensify Liquidity Pressure and Technically Suppress Gold Price Trends
Facing the third supply shock in five years, global central banks are under pressure to stabilize inflation expectations, leading to widespread increases in global government bond yields, including US Treasuries—but we believe the reasons for rising US Treasury yields go far beyond oil prices. After the US-Israel-Iran conflict, government bond yields in major countries generally increased. By June 5, 2026, the yields on 10-year US, Japanese, and German government bonds had risen by 58, 55, and 34 basis points respectively, reflecting that global central banks may need to raise interest rates to reinforce credibility and avoid unstable inflation expectations. However, since late April, the rise in US Treasury yields has been particularly pronounced, driving up real interest rates. As analyzed in our report, since April, expectations for AI-related capital expenditure in the US have been significantly revised upward, with markets rising sharply—the AI boom and fiscal easing have accelerated US economic growth, with early signs of overheating in apparent nominal growth and the job market, indicating that current interest rate levels are not 'restrictive.' To prevent the stock index surge and financial condition easing brought by the AI boom from pushing the economy further into overheating, the Federal Reserve may find it difficult to cut rates this year, and its guidance may lean hawkish, while potentially needing to raise rates twice before the end of next year. After Kevin Warsh took office, the default hawkish stance of Fed officials has continued to catalyze this market narrative. The Fed has entered a price discovery phase, leading to accelerated climbs in US Treasury yields and rising real interest rates. Although gold and real interest rate movements have diverged since the Russia-Ukraine conflict, from a short-term trading perspective, rising real interest rates are still technically unfavorable for gold performance. Since late April, the US 10-year real interest rate has risen by nearly 30 basis points. Additionally, recent large-scale financing by major tech companies, such as Google increasing its financing and SpaceX's IPO financing, and the potential for large IPOs like Anthropic and OpenAI before year-end, have also heightened US market concerns about liquidity tightening.
Multiple liquidity challenges + unexpected AI capital expenditure = more extreme market differentiation, with assets outside the AI 'bottleneck' facing comprehensive pressure, and gold is no exception. After the US-Israel-Iran conflict, rising energy prices, a stronger dollar, and higher interest rates led to a comprehensive tightening of global liquidity compared to 2025. However, the AI narrative has actually strengthened post-conflict, especially after this year's Q1 earnings reports, with AI-related capital expenditure being significantly and comprehensively revised upward, and bottlenecks in the AI hardware chain intensifying, with pricing power soaring against the trend—the bottlenecks in this chain have become the true 'core assets,' while other asset prices are being 'crowded out.' Against this backdrop, due to gold's lower demand inelasticity and increased marginal selling pressure as mentioned earlier, marginal changes in supply and demand become even more unfavorable for its price.
Short-Term Gold Prices May Remain Under Pressure—'No Strait Opening, No Gold Rally'
Failure to open the strait will exacerbate global energy shortages, potentially worsening the cash flow difficulties for both Gulf countries and developing net importers, which is unfavorable for gold supply and demand in the short term.
Global government bond yields, especially the US Treasury yield curve, are unlikely to decline in the near term, given that the Fed seems to have entered a short-term 'price discovery' mode, using the relationship between yield curve movements and changes in financial conditions to test the (appropriate) magnitude of rate hikes. If rising interest rates do not trigger a chain reaction of a significantly stronger dollar and a sharp stock market decline, and financial conditions tighten only modestly, it would prove that the interest rate increase is not only bearable but may also be a necessary policy adjustment, as we previously estimated the Fed's policy rate may need to tighten by at least 50 basis points. On the other hand, global central banks face some short-term pressure to raise rates, such as the European Central Bank continuing to signal tightening under the energy supply shock, while the Bank of Japan is also monitoring the possibility of high oil prices pushing up wages and inflation expectations. Consequently, global nominal interest rates may rise further in the short term, pushing up real interest rates and potentially putting further pressure on gold prices.
However, the Medium to Long-Term Allocation Logic for Precious Metals and Strategic Resources is More Distinct
After the short-term headwinds pass, namely when the strait enters an orderly opening phase and the US Treasury yield 'price discovery' is largely complete, it is still advisable to allocate to gold and strategic resource products. If the Strait of Hormuz enters an orderly opening phase in the future, oil prices are expected to fall, the US dollar index may also weaken, and global liquidity could marginally improve. Simultaneously, the marginal selling pressure on gold from Gulf countries and net oil-importing/exporting nations is expected to ease, so the phase most unfavorable for gold prices due to liquidity tightening and supply-demand changes may pass. Furthermore, falling oil prices will help lower US inflation, potentially easing Federal Reserve rate hike expectations, and its 'price discovery' process through US Treasury yields may be largely complete. After the upward pressure on US Treasury yields eases, the rapid rise in real interest rates will also come to an end.
US Treasury yields may continue to climb in the short term, but the upside is limited. Regarding the policy rate, our baseline assumption is that the Federal Reserve may still need to raise rates by 50 basis points to stabilize inflation expectations and maintain policy credibility. Although the short-term 'pendulum' may overshoot, we believe there are also constraints on the room for US Treasury yields to rise. This round of Fed rate hikes is aimed at extending the cycle, not reversing the boom. Furthermore, the reality of the US K-shaped economy also means that the extent of tightening from aggregate policy tools like rate hikes will be constrained by the lower end of the 'K-shape.' While US AI capital expenditure, profits of leading tech firms, and high-income group incomes remain resilient under high interest rates, middle- and low-income groups, small and medium enterprises, and highly leveraged financing entities are more sensitive to high rates. Lagged impacts of high interest rates have begun to appear in areas like private credit, all of which will constrain further upside for US Treasury yields.
Post-war, overseas fiscal policies tend to be loose, with further declines in fiscal discipline, which in the long run will actually strengthen the allocation logic for physical strategic assets (including gold). Historical experience shows that post-war, overseas governments often stabilize economic and social expectations by expanding defense spending, enhancing energy and supply chain security, and increasing household subsidies, making it difficult for fiscal deficit ratios to converge quickly. Current debt levels in developed economies are already at historical highs. If high debt and loose fiscal policy coexist long-term, market concerns about overseas fiscal sustainability and fiat currency credibility may intensify. Therefore, while short-term rising real interest rates and liquidity tightening may suppress gold performance, in the long cycle, declining fiscal discipline and fiat currency credibility will continue to strengthen the allocation value of gold and strategic resource products.
Risk warnings: The Strait of Hormuz blockade duration exceeds expectations; liquidity shocks lead to unexpected adjustments in assets including gold.
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