Geopolitical Conflict and the Indirect Bearish Transmission to Crude Oil Prices

An escalation in geopolitical conflict does not necessarily lead to a rise in gold prices. When Middle East tensions directly drive up crude oil prices, a chain reaction bearish for gold is triggered: escalation of US-Iran conflict → disruption of shipping in the Strait of Hormuz and a surge in crude oil prices → a rebound in energy inflation expectations → strengthened expectations of Federal Reserve rate hikes → a rise in US Treasury real yields → increased holding costs for gold → institutional reduction of long positions in gold.