Gold's Geopolitical Crossroads: Can the Israel-Iran Conflict Sustain Precious Metal Gains?

The simmering conflict between Israel and Iran has once again thrust geopolitical risk into the spotlight, prompting investors to reassess the role of gold as a safe-haven asset. While gold prices have inched higher—reaching ₹1,00,000 in India and surpassing $3,300 per ounce globally—the market's muted reaction contrasts sharply with historical precedents. Julius Baer's recent analysis offers critical insights into why this tension hasn't yet triggered a major gold rally, and what conditions could change the calculus.

The Muted Gold Response: A Speculative Surge, Not Safe-Haven Demand

Recent price movements suggest that the current gold rally is more about speculative momentum than genuine flight-to-safety dynamics. Julius Baer's research highlights that automated trading algorithms and short-term traders have driven most of the recent gains, rather than institutional investors seeking long-term protection. This contrasts with events like the 2018 U.S.-China trade war, when gold surged to record highs as businesses and investors braced for supply chain disruptions.

The firm's analysts note that markets have grown desensitized to geopolitical flare-ups unless they threaten systemic economic damage. For instance, while Israel's strikes on Iranian nuclear facilities and retaliatory missile attacks have disrupted shipping routes in the Persian Gulf, the conflict hasn't yet triggered the oil supply shocks or regional escalation required to ignite sustained safe-haven demand.

Historical Precedents: When Geopolitics Moved the Gold Needle

History shows that gold's performance during geopolitical crises depends on the conflict's scale and economic consequences. Consider the following examples:
- 1962 Cuban Missile Crisis: Gold prices rose 15% in a month as fears of nuclear war peaked.
- 1973 Yom Kippur War: Gold surged 20% amid oil embargoes and inflation.
- 2018 U.S.-Iran Sanctions: Gold climbed 14% as trade tensions and oil volatility spiked.

In each case, gold's rise coincided with tangible economic risks—supply chain disruptions, inflation, or currency debasement. Today's conflict lacks that critical mass, as Middle Eastern exporters like Saudi Arabia and the UAE have so far managed to offset limited production cuts, and central banks remain hawkish despite slowing growth.

Why the Conflict Could Still Impact Gold: Key Catalysts to Watch

Julius Baer's analysis identifies three scenarios that could shift the outlook:
1. Oil Supply Disruptions: If attacks on infrastructure or shipping routes force a sustained drop in Middle Eastern oil exports, global inflation and gold demand could surge.
2. Regional Escalation: Wider involvement of U.S., European, or Iranian allies could destabilize markets, triggering a flight to safe havens.
3. Central Bank Policy Shifts: If geopolitical risks force central banks to cut rates or adopt dovish policies (as the Bank of England recently hinted), the opportunity cost of holding gold would fall, supporting prices.

The Case for Holding Gold: A Balancing Act

For investors, the question is whether to treat gold as a tactical trade or a strategic hedge. Julius Baer's “constructive” outlook acknowledges that geopolitical risks remain elevated, but warns against overestimating the conflict's immediacy.

• Strategic Allocation: A 5-10% allocation to gold in a diversified portfolio remains prudent. It provides insurance against tail risks—such as a Middle East oil crisis or a global recession—while maintaining liquidity.
• Tactical Caution: Short-term traders should avoid chasing the current rally. Gold's recent gains have been amplified by algorithmic trading, which could unwind quickly if the conflict de-escalates or central banks tighten policy.

Final Takeaways for Investors

1. Monitor Geopolitical Escalation Metrics: Track attacks on critical infrastructure, shipping disruptions in the Strait of Hormuz, and U.N. sanctions.
2. Watch Central Bank Signals: Dovish comments from the Fed or ECB, or rate cuts in major economies, could boost gold's appeal.
3. Avoid Overweighting: Gold's role as a hedge is strongest during crises, but its returns are often lackluster during stable markets.

In conclusion, while the Israel-Iran conflict has nudged gold higher, a sustained rally requires more than headlines—it demands material economic consequences. Investors should treat gold as a critical, but limited, component of their risk management strategy.

Greg Ip is a columnist and deputy editor at The Economist, specializing in macroeconomics and financial markets. His analysis blends rigorous data-driven insights with an eye for real-world investment implications.