How do you view the divergence between gold prices and oil prices?

Since the outbreak of the US-Iran war, the two highly geopolitically related commodities, crude oil and gold, have shown completely different trends, with the former soaring sharply and the latter declining slightly. Why is that?

As a natural currency, gold has three major safe-haven functions: hedging against geopolitical risks, inflation risks, and dollar risks. Gold prices are influenced by these three forces simultaneously, thus playing different safe-haven roles at different stages.

Since the end of 2023, precious metals have experienced a super bull market, with gold prices soaring from $1,800 to over $5,000. The strong upward momentum is because gold is simultaneously serving as a hedge against geopolitical risks, inflation, and the US dollar.

In October 2023, on the basis of the Russia-Ukraine war, a large-scale conflict broke out between Israel and Palestine, plunging the Middle East into chaos. In 2024, the Red Sea crisis erupted, and the Strait of Mandeb was blockaded. In 2025, Trump took office again, causing the international order to shake. These are all manifestations of chaotic geopolitical situations, providing strong support for gold prices.

On the other hand, in 2023, the US economy shifted from overheating to stagflation. By 2024, influenced by political factors, the Federal Reserve, before resolving inflation, boldly started a rate-cutting cycle, flooding the dollar liquidity again. On one hand, this was a loosening phase; on the other, it carried the risk of secondary inflation. Gold thus took on both dollar and inflation hedging functions, fueling its rise.

With all three safe-haven functions aligned, how could gold not rise? Additionally, benefiting from the Fed’s easing cycle, both emerging and developed markets, whether A-shares or US stocks, experienced bull markets.

Regarding oil prices, last year’s oil price center was significantly lower than the previous year. This was because after Trump took office, he rallied OPEC to significantly increase oil production, attempting to force Russia to make concessions at the negotiating table. This strategy initially worked, with Putin making multiple concessions on negotiations. Without the US-Iran war, it is expected that in the first half of this year, Russia and Ukraine would sign a ceasefire agreement.

Since the outbreak of the Middle East war, both gold and oil prices have experienced multiple fluctuations, with their trends diverging for different reasons.

For gold, in mid to late January (half a month before the war), as the probability of conflict between the US and Iran continued to rise, gold prices increased, reflecting gold’s geopolitical safe-haven attribute. According to mainstream market expectations at the time, this conflict might resemble last year’s “midnight hammer” operation, lasting only a short period and mainly being a phase.

After the US launched a “decapitation” strike on Iran, gold briefly rebounded but soon plummeted. This was because capital shifted from gold to oil. Since gold holdings were overly concentrated earlier, the main funds aimed to go long on oil and sold gold to gain liquidity. In other words, the “rotation” from gold to oil caused gold to fall and oil to rise.

On the other hand, as overseas markets began pricing in a prolonged US-Iran conflict, risk assets like US stocks came under pressure, triggering a wave of redemptions. The US financial markets faced liquidity crises, and as an asset with high liquidity after cash, gold was heavily sold off. This means that the March sell-off of gold was not because international investors were bearish on gold, but as a self-protection strategy amid liquidity crises.

If it were just a liquidity crisis, gold prices often form a “deep V” pattern, providing a bottoming opportunity. The more troublesome part came after mid-March, when overseas expectations of the US-Iran conflict became more pessimistic. Concerns grew that the Strait might be blocked for a long time, and that the warring parties could attack each other’s energy facilities on a large scale, keeping oil prices high for a long time and causing devastating impacts on the global economy, even leading to the collapse of international order. In this scenario, the Fed might delay rate cuts or even restart rate hikes like in 2022. Based on these expectations, gold prices plunged, breaking recent years’ records for the largest retracement.

This indicates that gold’s geopolitical safe-haven function is still active, but the current sharp decline is driven by expectations of a reversal in Fed monetary policy. Gold’s dollar safe-haven attribute has overwhelmed its geopolitical and inflation hedging roles, becoming its main driver. Compared to previous declines, the fundamentals of gold have changed; it is no longer driven by liquidity crises or profit-taking, but by overseas concerns over tightening monetary policy. This worry is also reflected in risk assets like A-shares and US stocks—after all, a house built on a nest of eggs cannot be perfect.

Since the outbreak of the US-Iran war, crude oil prices have also experienced ups and downs. The cause of this volatility is the misperception of geopolitical risks by overseas investors. After the “decapitation” strike, oil prices continued to rise, approaching $120 per barrel. However, in early March, after Trump hinted that “the war will end soon,” the market began to execute the “TACO” trade, believing that the Iran situation might ease, causing oil prices to plunge by 30%. Unlike tariff issues, the main control of geopolitical crises is not in Trump’s hands; he cannot fully retreat if the Strait is blocked. Eventually, the market revised its expectations for oil, and prices resumed their upward trend.

In geopolitical matters, markets sometimes develop biases, but these mispricings are not necessarily bad. Oil price declines can create opportunities for accumulation, making it easier for later investors to enter.

Looking ahead, the trends of gold and oil depend on the pace of the US-Iran conflict. If it evolves into a prolonged war like Russia-Ukraine, gold may lack allocation value in the first half of the year, and energy stocks might be prioritized temporarily. However, there is still a possibility of a reversal. The US-Iran war could reach a critical turning point, depending on whether the Strait of Hormuz can be reopened soon—this will depend on Trump’s decisions.