Since mid-June, the escalation of geopolitical tensions in the Middle East, marked by the outbreak of the Israel-Iran conflict, briefly triggered market panic. However, after a short-lived “one-day” drop in risk assets, markets rebounded sharply, and both gold and oil prices surged before pulling back. We believe that the trajectory of major asset classes remains determined by trade policy.
In the short term, a “seesaw” effect between risk assets and safe-haven assets has become apparent. U.S. stocks have rebounded, buoyed by three main factors: heightened expectations of Federal Reserve rate cuts, an easing of the Israel-Iran conflict, and increased stock buybacks by listed companies. Meanwhile, gold and oil have retreated from recent highs. In the medium term, the economic outlook is highly uncertain, and downside risks to risk asset prices remain.
The Panic Sparked by the Israel-Iran War Was Short-Lived
On June 13, the Israeli military launched a large-scale airstrike against Iran, codenamed “Lion’s Roar.” In the first 12 hours after the attack, Iran was almost entirely on the defensive, suffering significant losses to its air defense network, nuclear facilities, and ground missile units. The military decision-making leadership was nearly wiped out.
Despite this, the market did not experience extreme panic. The VIX index, a gauge of market fear, peaked at just 22.17 between June 13 and 23, well below the record high of 52.33 seen in April when Trump announced new tariffs. After the U.S. struck Iranian nuclear facilities on June 22, U.S. stock futures opened on June 23 in a typical risk-off pattern, but there was no panic selling. This suggests that Iran’s ability to retaliate after being attacked by Israel and the U.S. was weak, indicating the conflict would not be prolonged.
The Seesaw Effect Between U.S. Stocks and Gold
Since Trump’s announcement of new tariffs on April 2, global markets have experienced turmoil, undermining confidence in the U.S. dollar as a safe asset and making “de-dollarization” a consensus view. By June 24, risk assets had recovered the losses sustained since the tariff announcement, but the U.S. dollar continued to depreciate. Concerns over the dollar’s status as a safe reserve asset have extended to U.S. Treasuries and equities.
For gold, as a safe-haven asset, a “seesaw” effect with U.S. stocks is evident. With the easing of the Israel-Iran conflict and rising expectations of Fed rate cuts, U.S. stocks have rebounded strongly. Gold’s pricing was not particularly sensitive to the Israel-Iran conflict and was limited by a cooling in short-term safe-haven sentiment, resulting in subdued safe-haven demand.
However, investment demand for gold is recovering. As of June 23, the world’s largest gold ETF, SPDR, held 957.4 tons of gold, just below the April 21 peak of 959.17 tons
(Chart: Comparison of COMEX Gold Prices and Gold ETF Holdings)
In the medium term, U.S. stocks, the U.S. dollar, and gold are likely to diverge significantly. The dollar is likely to break the traditional pattern of supporting U.S. stocks, and both may decline together. Historical experience since the 1970s shows that U.S. stocks are relatively independent of the dollar, and the relationship between the two is not simply linear. The dollar index reflects the relative growth strength between the U.S. and other countries, while U.S. stocks depend more on domestic fundamentals.
Typically, the U.S. economy can benefit from a weak dollar; a significant depreciation of the dollar can allow U.S. stocks to continue rising. The logic is that a weak dollar stimulates U.S. exports and reduces the burden of dollar-denominated debt, with the dollar exchange rate and U.S. Treasury yields usually moving in the same direction. However, the current weak dollar may not benefit the U.S. economy as before. This is because the dollar’s international settlement status is weakening, and de-dollarization-induced depreciation can easily trigger capital outflows, which export growth is unlikely to offset.
Oil Returns to Its Starting Point
For oil, the oversupply fundamentals still require time to be digested, and prices have surged and then retreated in response to geopolitical crises. First, Iranian oil exports have been priced into the market in recent years due to sanctions. Iran currently exports 1.6 million barrels per day, which has little impact on global supply. Second, it is difficult for Iran to completely block the Strait of Hormuz, which connects the Persian Gulf and the Arabian Sea and is 35 to 60 miles wide, with most of the waters belonging to Oman rather than Iran. The width of the strait makes it nearly impossible for Iran to physically enforce a full blockade. Although many ships must pass through Iranian waters, they can still reroute through UAE and Omani waters, so they are not entirely dependent on Iranian-controlled channels. Historically, despite Iran’s repeated threats to close the Strait of Hormuz in 2011, 2012, and 2018, it has never done so due to practical constraints1.
In summary, since the U.S. imposed new tariffs in April, financial market uncertainty has become the norm, compounded by frequent geopolitical crises. Persistent safe-haven demand continues to support gold. Meanwhile, tariff shocks and debt issues have steadily eroded the dollar’s credibility, and de-dollarization provides solid long-term support for gold. However, in the absence of a “tailwind” from Fed rate cuts, gold currently lacks new short-term drivers and is fluctuating at high levels. Looking ahead, gold is still more likely to rise than fall. Investors may consider CME’s micro gold futures (MGC) or gold futures and options on the Shanghai Futures Exchange to capture investment opportunities and hedge risks.
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