Ongoing conflicts in the Middle East are driving a surge in oil prices, precious metals and defence stocks as markets react.
What happened?
Over the weekend, US and Israeli strikes hit Iranian military and missile infrastructure after nuclear talks stalled. Iran retaliated across the region.
That led to temporary airspace closures and disruptions near the Strait of Hormuz, a key shipping chokepoint through which about 20% of daily global oil consumption transits. Because roughly one-third of global crude production is tied to the Middle East, even the threat of disrupted flows can move markets before any physical supply is lost.
Why the Strait of Hormuz matters
A chokepoint is a narrow sea route where many oil tankers must pass. If traffic is delayed, insurers charge more, freight costs rise, and physical deliveries can be delayed.
Markets price risk of disruption quickly: traders add a risk premium to oil and other assets even if actual barrels haven’t been cut off. That premium can push energy prices and related assets higher and raise inflation expectations.
What markets have already done
Oil and gold have risen, and the US dollar has strengthened. Nominal yields softened a bit, but real yields (yields adjusted for inflation expectations) haven’t collapsed. That suggests markets are treating this more as a risk-premium event than a confirmed global growth shock.
Volatility measures were already elevated coming into the weekend, so some investor positioning was defensive before the latest strikes.
Three scenarios going forward
1. Base case - contained but tense
Retaliation is limited, shipping disruption is temporary, and insurance markets normalise. Oil keeps an elevated premium; gold stays supported; equities remain volatile but don’t collapse.
2. Bear case - sustained Strait disruption
Tanker flows and insurance remain impaired, physical supply is materially affected. Oil moves structurally higher, LNG tightens, and Asian growth (China, India, Japan, Korea) is hit first. Equities sell off broadly, real yields fall, and gold outperforms strongly.
3. Bull case - rapid containment
Diplomacy or de-escalation restores normal shipping fast. Risk premia compress, oil and gold pull back, and equities rally on relief.
Investor takeaways
- Gold: Though gold has rallied extensively over the past two years, the pace of the rally right now is not unprecedented. In fact, it is actually quite muted when you compare it to the significant repricing of gold observed in the late 1970s in the lead-up to Volcker's fight against inflation, which was itself triggered by the 1973-1974 OPEC oil embargo and then the 1979 Iranian Revolution. In 2024-26, we have observed a very constructive environment for gold, with significant geopolitical volatility, falling interest rates, a poorer economic outlook and an increasing narrative around de-dollarisation. The recent market volatility triggered by AI disruption in software, combined with the fresh risk of an energy shock and inflationary pressures stemming from US and Israel's attack on Iran, have added on top of that bullish environment new developments which look strikingly similar to the late 70s rally and may be the final tipping point that potentially triggers a gold supercycle in which there is sustained, strong outperformance. In the short term, we believe markets are underpricing the risk of a dragged-out, sustained conflict in Iran, which could translate to persistently high energy prices that lead to stickier and hotter inflation and, in turn, complicate the rate path for the Federal Reserve and risk an economic downturn. These are positive scenarios for gold.
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- Defence: Defence spending is anchored to structural geopolitical shifts rather than short-term volatility. Even if this escalation proves contained, the broader move toward bloc formation and strategic rivalry remains intact. The world is increasingly operating in a Cold War framework, with sustained military modernisation across the US, Europe and parts of Asia. Spending is also shifting toward defence technology, including missile systems, drones, cyber and AI-enabled capability. That creates a multi-year tailwind that is less cyclical and more policy-driven than traditional industrial demand
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- Energy: Energy sits at the centre of this escalation because the Middle East remains critical to global supply and Asia remains structurally dependent on Gulf flows. Even without realised supply loss, perceived disruption to Hormuz tightens freight, insurance and pricing dynamics quickly. In the near term, oil will respond to the duration and credibility of disruption risk. In a contained scenario, risk premia can fade. In a prolonged disruption, energy moves from volatility event to macro shock. Structurally, however, this reinforces the case for energy security, LNG infrastructure and diversified supply. Governments and corporates are unlikely to reduce investment in supply resilience in a world of rising geopolitical friction.
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