When geopolitical conflicts erupt, the market's initial reaction is often to "buy gold." However, over a longer timeframe, it becomes clear that even with war and sharp oil price increases, gold sometimes surges, sometimes peaks and then falls, and sometimes even trends lower consistently. What truly determines the direction of gold prices is often not the conflict itself, but whether oil prices can push inflation to a new level, and whether central banks will use higher real interest rates to suppress this "war premium."
An analyst from Guohai Securities, Lin Jiali, states the core logic plainly in a report: "Geopolitical conflicts provide gold with only a first-order, short-term safe-haven sentiment. For gold to embark on a sustained, trending bull market, the second-order determining factors are whether oil prices substantially raise the inflation anchor and how central banks respond to inflation (the direction of real interest rates)."
The report reviews several historical cases—including the 1973 Yom Kippur War/Oil Embargo, the 1979 Iranian Revolution crisis, the 1980 Iran-Iraq War, the 1990 Gulf War, the 2003 Iraq War, the 2020 US-Iran conflict, the 2022 Russia-Ukraine conflict, and the hypothetical 2025 "12-Day War"—within a single analytical framework. It ultimately identifies three common "paradigms": 1) Structural supply shocks leading to stagflation and a trending gold bull market; 2) Temporary disruptions or available alternatives, resulting in only a short-term spike in oil and gold prices; and 3) Central bank policy reactions overwhelming the war premium, leading to gold price suppression.
Applying this historical framework to the hypothetical 2026 US-Israel-Iran conflict, the report concludes with a "realistic" outlook: the oil price anchor may shift upward from $70 to the $95–105 range, but inflation is currently "elevated yet not out of control," and the Federal Reserve is not yet considered "behind the curve." Under this combination, gold is more likely to be a high-volatility, range-bound asset. For a clearer upward trend to emerge, either a ceasefire coupled with a weakening US economy and Fed signals for rate cuts is needed, or an escalation leading to a prolonged blockade of the Strait of Hormuz, unanchored inflation expectations, and forced central bank accommodation. The latter path would be more volatile, potentially involving an initial decline.
The first key checkpoint is not the conflict's developments, but whether oil prices undergo a "structural shift" to a new equilibrium. The report distinguishes between "temporary spikes" and "sustained anchor shifts" in oil prices, depending on the size and duration of the supply gap and the availability of alternative supplies.
In 1973, the critical event was not the war's outbreak but the OAPEC oil embargo against the US. Oil prices jumped from around $2.90 per barrel pre-embargo to $11.65 by January 1974, and high prices persisted even after the embargo ended. Gold did not rally immediately after the war started; it initially declined. The main bull phase emerged only after the market confirmed that the oil shock would translate into a longer-term inflation problem.
Conversely, during the 1990 Gulf War, although initial supply disruptions caused a rapid oil price surge, subsequent inventory releases and alternative supplies quickly offset the shock. Once oil prices retreated, gold also fell back near pre-war levels. The 2020 US-Iran conflict and the hypothetical 2025 "12-Day War" are closer to "tail risk repricing" events: markets initially price in worst-case scenarios, but the premium quickly unwinds once it's clear that oil shipments remain uninterrupted or retaliatory actions are contained.
The report emphasizes that unless an oil price spike transitions from "news-driven" to a "new price anchor," it is difficult for gold to extend a safe-haven rally into a sustained trend.
Stagflation, not merely rising oil prices, acts as the switch that transforms safe-haven demand into a lasting trend. The impact of rising oil prices on gold must pass through a second filter: "inflation + growth." The report describes the typical environment for gold's transition from short-term safe-haven to trending bull market as a stagflation scenario, where high inflation and low growth are both priced in simultaneously.
The 1979 Iranian Revolution crisis serves as a classic example: crude oil prices nearly tripled between 1979 and 1980, rising from under $15 per barrel at the end of 1978 to nearly $40 by 1980. US CPI soared to 13.3% by late 1979, and coupled with initially accommodative monetary policy, confidence in fiat currencies was shaken, propelling gold into a historic bull market.
In contrast, consider the 2003 Iraq War: Iraq's pre-war exports averaged about 2 million barrels per day, a smaller disruption compared to 1990, and other OPEC members had both the capacity and willingness to compensate. Gold prices rose on pre-war uncertainty but sold off after the "fact" of the invasion. Subsequent strength was driven more by broader macro factors supporting gold, rather than oil prices themselves.
Central bank policy reactions can often be a harder constraint than the conflict itself: if central banks respond to inflation with aggressive tightening, rising real interest rates and a stronger US dollar can suppress gold prices, overriding the war premium.
The 1980 Iran-Iraq War is a prime example: surging oil prices did not prevent gold from declining significantly during Paul Volcker's disinflation cycle. The report stresses that what ultimately "broke gold" was the soaring real interest rates and a stronger dollar, which increased the opportunity cost of holding non-yielding assets.
The 2022 Russia-Ukraine conflict exhibited a similar pattern: the initial safe-haven bid was effective but was later suppressed by Fed tightening. The report cites data showing the US 10-year TIPS yield rising by 250 basis points over 2022, with the US Dollar Index gaining about 8% for the year, causing gold to relinquish much of its war-related premium.
The implication is straightforward: when the market narrative shifts from "escalating war" to "more hawkish central banks," gold tends to transition from a safe-haven asset to one priced primarily by interest rate dynamics.
To explain why similar oil price surges lead to vastly different gold price trajectories, the report employs the World Gold Council's GRAM framework, decomposing gold's returns into four drivers: currency (USD strength), risk and uncertainty, interest rates and liquidity, and momentum and trend (including ETF flows and futures positioning).
This framework doesn't provide a "magic indicator," but it highlights an often-overlooked fact: gold's performance isn't solely dependent on geopolitical risk. The US Dollar Index, 10-year real yields, inflation expectations, and capital flows all compete for influence. A shift in dominance among these variables can lead to entirely different gold price paths during the same conflict.
Applying a three-condition check to the hypothetical 2026 US-Israel-Iran conflict, the report assesses the current setup as more conducive to "high-volatility range-trading."
Condition 1: Has the oil price anchor shifted upward? The assessment is a potential shift from $70 to the $95–105 range, heavily dependent on negotiations and the reopening of the Strait of Hormuz. Citing International Energy Agency data, the report notes the strait transited about 20 million barrels of oil and products per day in 2025, accounting for roughly 25% of global seaborne oil trade. Strategic petroleum releases could partially mitigate the loss but are unlikely to cover the full gap, and LNG shipments are not protected.
Condition 2: Is inflation "completely out of control"? The judgment is "elevated but far from失控 (out of control)": February CPI was 2.4% YoY, core CPI 2.5%; January PCE was 2.8% YoY, core PCE 3.1%. The NY Fed's February survey showed 1, 3, and 5-year inflation expectation medians all at 3.0%, suggesting long-term expectations are not yet significantly unanchored. Key metrics to watch include whether CPI/PCE re-accelerates for 2-3 consecutive months, whether core measures turn upward, and whether long-term expectations become unanchored.
Condition 3: Are central banks "behind the curve"? The conclusion is "not currently definable as behind the curve." The report supports this with two points: the ex-post real policy rate remains positive based on a midpoint policy rate of 3.64%, and the 10-year TIPS yield had risen to 2.13% as of March 27, indicating the market does not price the Fed as being forced to tolerate higher inflation.
Combining these three conditions, the report leans towards the view that in the short term, gold remains more constrained by the US dollar and real interest rates than unilaterally driven by geopolitical news.
The report outlines three potential future paths, with the true divergence points being "strait reopening" and "signals for rate cuts."
Path A: Soft Landing, Narrow Range – The strait partially reopens within 2-3 months, oil prices retreat to around $90 but not fully to pre-conflict levels; inflation declines slowly but remains above 2.5%; the Fed cuts rates once before year-end. This corresponds to gold trading in a wide range at high levels, below the January high of $5,598 per ounce.
Path B: Transition from War Logic to Macro Easing – A ceasefire or strait reopening within weeks, oil prices fall below $80/barrel in Q3, PCE falls below 2.5%, and the Fed resumes cutting rates in Q3 or Q4 (two 25bp cuts). Gold could potentially transition into a "macro easing bull market" similar to the post-2003 period.
Path C: Black Swan – Peace talks collapse, the strait remains blocked for over 3 months, oil prices stay high, inflation expectations become unanchored, and the Fed is forced to tolerate inflation amidst a potential recession, leading to lower real rates. The report specifically cautions that in the initial phase of this scenario, gold might first be pressured by liquidity concerns and high real rates. The strongest rally phase would likely only begin once the market starts pricing in "central bank accommodation." Theoretical upside is greatest here, potentially retesting $5,500+ or breaking to new highs.
The report's operational implications are restrained: in the short term (next 1-2 months), avoid chasing rallies on the day geopolitical news breaks. Instead, wait for signals of a shift in pricing dominance, such as a turn in the gold/oil ratio, a decline in TIPS yields, or a reversal in ETF outflows. It also suggests a trading-oriented watch zone: if gold pulls back to the $4,200–4,400 per ounce range and holds, while oil remains above $100, it may begin to offer allocation value.
On a longer time scale, the conclusion narrows to one key point: whether gold can transition from a "safe-haven" play to a "trending" asset ultimately depends on whether the Hormuz disruption escalates from a price problem to a quantity constraint, and whether the Fed moves from holding steady to signaling rate cuts. War is merely the starting point; the macro environment determines the final outcome.
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