Oil rises, gold hesitates: markets react to Strait of Hormuz risks

INN: In an email commentary, you noted that safe-haven demand and a rising dollar are having a push-and-pull effect on gold prices. Could you elaborate on this?

Ernesto Di Giacomo (EDG): Gold is currently caught between two opposing forces.

On the one hand, geopolitical tensions and global uncertainty are increasing demand for traditional safe-haven assets, which naturally supports gold prices. Investors often turn to gold during periods of volatility because it is considered a store of value that is less affected by political or financial shocks.

On the other hand, the US dollar is strengthening, increasing pressure on gold. Since gold is priced in dollars, a stronger dollar makes the metal more expensive for investors holding other currencies, potentially reducing demand. What we’re seeing right now is a tug-of-war between these two dynamics: safe-haven flows are pushing gold higher, and dollar strength is limiting the magnitude of those gains.

INN: Oil and gold prices are often correlated through inflation, risk and economic volatility. How would you characterize his performances recently?

edg: Recently, both markets have been reacting strongly to geopolitical developments, especially in the Middle East. Oil prices have been volatile, particularly amid concerns about potential supply disruptions on key shipping routes such as the Strait of Hormuz. This volatility has also impacted broader inflation expectations.

Meanwhile, gold is moving in a more complicated manner. While geopolitical tensions generally support gold, investors are also focused on the path of monetary policy and interest rates. So although oil is rising amid supply concerns, gold is not always up immediately, as higher energy prices could reinforce inflation fears, resulting in central banks keeping interest rates higher for longer periods of time.

INN: Gold is typically the first asset investors turn to during geopolitical crises, yet we are seeing it struggle to gain momentum during the current Middle East conflict. What is different about this moment compared to previous periods of geopolitical tension?

edg:What makes this moment different is the macroeconomic backdrop.

In past geopolitical crises, gold has often rallied strongly because interest rates were relatively low and the opportunity cost of holding gold was limited. Today the atmosphere is different. US Treasury yields remain high, and the Federal Reserve is still cautious about cutting rates too quickly.

When yields are high, investors can get attractive returns from fixed income assets, reducing the attractiveness of holding non-yielding assets like gold.

So while geopolitical risks are supporting demand for safe havens, the broader monetary environment is preventing gold from rising as aggressively as it might have in the past.

INN: You mention that a strong dollar and rising Treasury yields are weighing on gold. Can you explain how this relationship works and why these factors can sometimes outweigh the traditional safe-haven appeal of gold?

edg: This relationship largely depends on opportunity cost and currency dynamics. Gold doesn’t generate interest or dividends, so when Treasury yields rise, investors have an alternative asset that offers returns with relatively low risk. This makes bonds more attractive than holding gold.

Also, a stronger dollar puts downward pressure on commodities that are priced in dollars. When the value of the dollar rises, international investors need more of their local currency to buy the same ounce of gold.

As a result, global demand may soften. When both factors, higher yields and a stronger dollar, occur together, they can sometimes overwhelm the traditional safe-haven demand that gold typically receives at times of geopolitical uncertainty.

INN: Oil prices are rising again amid concerns over potential disruptions in the Strait of Hormuz. How closely are gold markets tracking energy prices right now, and could higher oil prices change the outlook for the precious metal?

edg:Energy prices are extremely important for the precious metals market as they influence inflation expectations. If oil prices rise significantly and remain high, it could increase transportation and production costs across the global economy. That dynamic often translates into broader inflationary pressures.

In that scenario, gold could benefit because it is widely seen as a hedge against inflation. However, there is another layer to consider. If rising oil prices keep inflation high, central banks may delay interest rate cuts or even maintain restrictive monetary policy for a longer period of time. In the short term, this may limit gold’s upside. However, in the medium term, persistent inflation risks may ultimately strengthen the bullish case for the precious metals.

INN: Investors are keeping an eye on key US inflation indicators such as the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) Price Index. How important are these data points in shaping interest rate cut expectations and, by extension, the direction of gold prices?

edg: These indicators are extremely important because they directly influence expectations about Federal Reserve policy. The CPI and PCE indices provide information about whether inflation is continuing to move toward the Fed’s target.

If inflation data shows that price pressures are easing, markets may increase expectations of a rate cut. In that environment, gold would benefit from lower interest rates, reducing the opportunity cost of holding the metal. Conversely, if inflation remains persistently high, the Federal Reserve could keep rates higher for a longer period of time, which could weigh on gold in the near term.