- Protracted US-Iran conflict is keeping energy exports constrained, shipping costs elevated, and oil prices higher for longer
- Higher energy prices have revived inflation risks, lifted treasury yields, and pressured gold from August highs
- However, gold’s sensitivity to rising real yields has halved since 2022, supported by stronger structural demand and shifting macroeconomic conditions worldwide
- Central bank reserve diversification, persistent fiscal deficits, and rising sovereign debt continue to reinforce gold’s long-term narrative
- Overall stance remains constructive; but we recalibrate our quarterly target prices lower on rising yields
Related insights
US-Iran disruption is looking increasingly structural. The probability of a protracted US-Iran conflict has increased substantially. The MOU between the two countries broke down in July, and tensions re-escalated in August and September. Consequently, traffic through the Strait of Hormuz (SOH) has once again ground to a halt. Since then, any attempt at diplomacy has proven ineffective. In particular, the US and Iran seem to have reached an impasse on matters pertaining to nuclear weapons. Energy markets have, in turn, shifted to reflect these developments: Brent has rebounded from its July lows and is now hovering around the USD100/bbl mark. The region is actively re-routing some of its energy exports via the Gulf of Oman and Bab el-Mandeb, but aggregate volumes remain below pre-war levels while costs of shipping (including transport fees, insurance, and ship-to-ship transfers) continue to stay markedly elevated. As such, while these re-routing measures may help to partially alleviate the Hormuz disruption, we believe higher-for-longer energy prices are still firmly in play.
What does this mean for rates? The consequence of higher-for-longer energy prices is, obviously, that inflation risk is once again skewed to the upside, which has led markets to price in more rate hikes. Market consensus on US Fed policy has swung wildly this year. Expectations were broadly for the Fed to continue cutting rates at the start of the year, but the advent of the US-Iran conflict (and its subsequent re-escalations) turned them decisively more hawkish. Consequently, the Fed raised policy rates by 25 bps for the first time in over three years at its September FOMC meeting. As of 6 Oct, markets are pricing another hike by December this year (after the milestone September hike) and an over 40% chance of one more in January next year. As a result of this shift in the rates outlook, government bond yields have moved sharply higher. The 10-year US treasury yield, for example, has risen past the 5.3% handle, the highest level in 24 years. Accordingly, gold fell from its late August peak of USD4,657/oz. to USD4,128/oz. as of 6 Oct.
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