Middle East Risk And Safe Haven Demand
Iran’s new supreme leader, Mojtaba Khamenei, said the Strait of Hormuz should remain closed and that Iran will continue attacks on Persian Gulf neighbours, according to Bloomberg. US President Donald Trump called Iran “a nation of terror and hate” and said the situation is “moving along very rapidly” towards his pledge of limited military involvement. Market focus remains on developments in the Middle East. A longer conflict can increase demand for safe-haven assets such as gold. At the same time, higher oil prices linked to the conflict have raised inflation fears in the US. This can support expectations that the Federal Reserve keeps interest rates higher for longer, which can favour interest-bearing assets over gold. When we were looking at the situation in early 2025, the threat of the Strait of Hormuz closing sent a shock through the energy markets. We saw WTI crude prices spike to over $110 a barrel in that first quarter, which directly fueled the inflation fears mentioned. This forced the Federal Reserve to maintain its restrictive monetary policy throughout most of last year.Rates Volatility And Gold Positioning
The conflict created a tough environment for gold, trapping it between safe-haven demand and the pressure of high interest rates. While geopolitical bids kept a floor under the price, the strong dollar and attractive bond yields capped any significant rally past the $5,250 level for months. This created a period of high volatility but limited directional movement for the precious metal. Now, as of March 2026, the intense military posturing in the Persian Gulf has cooled, bringing more stability to oil supply routes. We’ve seen WTI crude settle into a range around $85 a barrel, supported more by recent OPEC+ production discipline than by active conflict risk. This has allowed inflation to ease, with the latest February CPI report showing a headline figure of 2.8%, moving closer to the Fed’s target. Given this drop in geopolitical tension, implied volatility in the energy sector has fallen significantly. The CBOE Crude Oil Volatility Index (OVX), which soared above 50 during the 2025 scare, is now trading in the much calmer mid-20s. Traders should consider strategies that benefit from this lower volatility, such as selling options premium on major energy ETFs. With inflation moderating, the market’s focus has shifted from rate hikes to the timing of the first Fed rate cut, which is now anticipated in the second half of 2026. This changing interest rate outlook removes a major headwind for non-yielding assets like gold. Long-dated call options on gold futures could be an effective way to position for upside as monetary policy begins to ease later this year. Create your live VT Markets account and start trading now.
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