US President Donald Trump said Iranian officials contacted him to seek an agreement to end the war. He said it was “too late” and that the US is pushing to destroy Iran. He said Iran asked, “how do we make a deal?” He said the US wants to fight now more than Iran does.

Gold And Oil Market Snapshot

Gold (XAU/USD) was 0.80% lower on the day at $5,093 at the time of writing. West Texas Intermediate (WTI) was up 4.57% at $78.00. Gold is widely used as a store of value and is often treated as a safe-haven asset during turbulent times. It is also used as a hedge against inflation and currency weakness because it does not rely on a single issuer or government. Central banks are the largest gold holders and may buy gold to diversify reserves. Central banks added 1,136 tonnes of gold worth about $70 billion in 2022, according to the World Gold Council, the highest yearly purchase since records began. Gold often moves inversely to the US Dollar and US Treasuries, and can also move against risk assets such as shares. Its price can react to geopolitical instability, recession fears, interest rates, and changes in the US Dollar.

Energy Supply Shock Risk

The escalation with Iran is making the oil market extremely tense, pushing WTI crude up to $78.00. We need to be positioned for further supply shocks, as any conflict threatens the Strait of Hormuz, through which about 21% of global petroleum liquids consumption passes. This makes long call options on energy stocks and oil futures the most direct play on this geopolitical risk. Despite the conflict, gold is surprisingly down, which points to a massive flight to safety in the US Dollar. When we saw similar events in the past, a surging dollar often puts a ceiling on gold, as the metal is priced in USD. Derivative plays should therefore focus on dollar strength, potentially through options on currency ETFs, as this appears to be the market’s primary safe haven right now. However, we should not ignore the underlying support for gold. We saw central banks buy a record 1,078 tonnes back in 2023, continuing the trend from 2022, and that buying has provided a strong floor. This dip could be a good opportunity to sell out-of-the-money puts on gold miners or XAU/USD itself, anticipating that central bank demand will limit the downside. The most certain outcome of this situation is a spike in market volatility. We saw the VIX, the market’s “fear gauge,” jump over 90% in the weeks surrounding the start of the Ukraine conflict in early 2022. Buying straddles or strangles on major indices is a pure volatility play that will profit from large market swings in either direction as this crisis unfolds. We must now watch inflation expectations very closely. The last major energy shock back in 2022 forced the Federal Reserve into an aggressive hiking cycle which ultimately impacted the market for years. A sustained oil price above $80 will put immense pressure on the Fed, and any hint of a hawkish response will further strengthen the dollar and weigh on assets like gold. Create your live VT Markets account and start trading now.

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