Oil up, gold up, USD up, US Treasuries down – it looked like the US economy was in for a sizeable recovery or even a shift from US disinflation to US reflation in terms of the investment regime. Yet the breakneck speed at which markets repriced the shift raised some question marks. After the escalation in the Middle East over the weekend, it has become clear that the geopolitical hedges such as oil and gold have triggered the spikes, explaining, at least in part, the high-speed moves.

When looking at these geopolitical drivers, we see many similarities with the aftermath of the attacks on Israel in October. Yes, the perception may be that the turn of the screw in the Middle East will result in ever higher levels of escalation. After years of proxy wars, there has now been a direct attack between the regional superpowers for the first time. Yet the immediate impact will likely be very similar to past geopolitical shocks. So final spikes in oil prices would be followed by continuous abating of the fear factor and an easing towards lower and fundamentally more balanced price levels.

The same holds true for gold with a certain twist. There the China factor still adds to the complexity, as the market is not fully transparent and the self-sustaining factors of the Chinese stampede into gold seem to have some legs. Yet we expect some normalisation here as well, as the dust will settle eventually. Time – and the data – will tell. If the facts change, the assessments must change as well.

Given the latest US inflation prints and the European Central Bank’s decision not to cut rates, we had to push back our US rate cut expectations to the third quarter this year and curb our EUR/USD forecasts as well. 

A closer look at oil: Geopolitics strikes again

After the events of the weekend, it is understandable to fear a hot-headed escalation in the Middle East and to construct alarming scenarios of an impending oil crisis. However, we believe that the situation is similar to that of last autumn, when oil prices temporarily rose above USD 90 per barrel. There are several reasons for an eventual reversal, including a slowdown in demand, an easing of Saudi Arabia’s production cuts, and a cooling of today’s exceptionally bullish sentiment to more normal levels. We maintain a cautious view.

A closer look at gold: Still a head-scratching rally

In the past, the kind of strong performance we are currently observing in the gold market has only occurred in times of extreme economic stress. The euphoric sentiment and the positioning in the futures market suggest that the rally is self-supporting, based on the narratives around looming US interest rate cuts, a gold rush in China, and continuing central bank buying.

For gold investors, where to from here?

While geopolitics is not a game changer for gold unless there is a lasting impact on the economy (e.g. because of a war or an oil crisis), the tensions further skew short-term price risks to the upside. This is because they further fuel the euphoric sentiment. That said, sentiment cycles come to a close eventually and we would be very surprised if this was not the case this time around. The problem is that timing the end of such a cycle is almost impossible. We recommend not to position for lower prices now, even though we remain convinced that in the medium to longer term, there should be more downside than upside.