Assessing the Geopolitical Risk Premium: Is a U.S.-Iran Conflict Warranting Immediate Hedging?

The U.S.-Iran geopolitical risk premium has long been a wildcard in global markets, oscillating between periods of acute volatility and relative calm. As of late 2025, renewed tensions-fueled by Trump's 25% tariff threats and fears of Persian Gulf disruptions-have reignited debates about whether investors should hedge against a potential conflict. This analysis evaluates the current landscape through the lens of historical patterns, structural constraints, and asset allocation strategies, offering a framework for navigating the uncertainty.

Historical Context: Patterns of Market Response

Historically, U.S.-Iran tensions have triggered predictable market reactions. During the June 2025 conflict involving Israel and the U.S., oil prices surged due to fears of Strait of Hormuz disruptions, a chokepoint handling 20 million barrels per day. Energy and defense stocks typically outperform in such scenarios, while equity markets in energy-importing regions struggle. Gold, as a safe-haven asset, also sees inflows, as seen in 2020 when tensions spiked. However, these impacts are often temporary, with markets stabilizing once risks become clearer.

The 1990 Gulf War provides another precedent: the U.S. dollar surged as a haven currency, illustrating how investors prioritize liquidity and stability over long-term fundamentals during crises. Yet, the 2025 de-escalation signal from Trump in January 2026-leading to a sharp oil price drop-demonstrates that markets can rapidly unwind risk premiums when geopolitical rhetoric shifts. This underscores the importance of monitoring policy signals and structural realities, such as the U.S.'s limited capacity to support a leaderless Iranian revolution, which historically curtail military escalation.

Current Dynamics: Late 2025 Market Volatility

In December 2025, U.S.-Iran tensions have driven Brent crude to $66.52 and WTI to $62.02 per barrel, reflecting fears of supply disruptions in the Persian Gulf. The Strait of Hormuz, critical for 14.5 million barrels per day, remains a focal point, with even the threat of closure enough to elevate prices. Trump's tariffs on countries trading with Iran have further amplified uncertainty, though analysts argue these measures may disproportionately harm Tehran.

Despite these risks, financial markets have shown resilience. The S&P 500 and Nasdaq 100 continued upward trends, suggesting investors view the tensions as temporary. Gold and silver prices, however, surged to near-record highs, signaling risk aversion. Meanwhile, Venezuela's resumption of oil exports has introduced conflicting signals for traders, complicating near-term supply assessments.

Strategic Asset Allocation: Hedging in a Volatile Environment

Given these dynamics, asset allocators must balance caution with pragmatism. Energy and defense sectors remain attractive hedges against supply shocks and military escalations, while gold and other safe-haven assets provide liquidity in a crisis as seen in 2020 when tensions spiked. However, overexposure to these sectors risks underperformance if tensions de-escalate rapidly, as seen in January 2026.

For long-term investors, diversification is key. Energy-importing regions should prioritize alternative energy sources to mitigate exposure to oil price swings, while global portfolios can benefit from geographic diversification to offset regional volatility. Additionally, investors should monitor U.S. force posture changes and geopolitical rhetoric, which could reignite volatility.

Conclusion: Weighing the Premium

The current U.S.-Iran risk premium warrants hedging, but not at the expense of long-term strategy. Historical precedents and late 2025 data suggest that while short-term volatility is likely, full-scale conflict remains improbable due to structural constraints. Investors should adopt a layered approach: overweighting energy and safe-haven assets for near-term protection while maintaining a diversified, growth-oriented portfolio. As Trump's tariff threats and regional tensions evolve, agility-and a clear-eyed assessment of the geopolitical risk premium-will remain critical.