Gold and the Iran crisis: what’s behind extreme price volatility?
By James Luke, Senior Portfolio Manager, Gold and Commodities, Schroders
Gold has lost roughly one fifth of its value in recent weeks, appearing to fail in its traditional role as a safe haven during conflict. What explains this performance – and what is the bigger picture?
The gold price rose in the initial days of the conflict, to reach over $5,300 on 3 March. Since then it has fallen in a series of dramatic steps. By 23 March, as the war entered its fourth week, gold had dropped to around $4,400, one of the sharpest drops on record.
Our view is that over time gold has proved itself a good portfolio diversifier and a valuable hedge against long-term trend increases in geopolitical and fiscal stress. However, gold has often not been a good short-term geopolitical hedge, or hedge against significant market stress.
Why has gold sold off?
We see three short-term drivers at play:
- A knee jerk reaction to a lower chance of rate cuts. A likely shortage of oil and gas triggered by the closure of the critical Hormuz shipping channel, coupled with lasting damage inflicted on Gulf energy infrastructure, feeds into higher inflation expectations which in turn puts pressure on central banks to raise interest rates.
- Gold being drawn into “risk off” market dynamics. Gold returns had been very positive over the past year and more. In a period of “risk off”, with high market stress and a short term rush for cash, gold can get sucked in.
- Concerns around fiscal stress leading to gold sales. This has included worries that sovereign wealth funds have sold positions to fund government cash calls; or that emerging market central banks are possibly using gold reserves as a source of near-term liquidity to support currencies or other requirements, such as defense spending.
There has been a notable contrast between sharp selling in western markets, with much stickier demand in China. This is clear in the chart below, tracking physical gold ETF flows for Europe and North America vs Asia since the start of 2025.
Cumulative ETF flows, US$ billion, since January 2025
Is the gold bull market therefore over?
Extreme oil price rises would likely inflict damage on all asset classes in the very short-term, including gold.
But the broader picture is very different. We think the way to frame the mid- to long-term risk/reward of gold investments from an asset allocation perspective is to ask whether either the “debasement” trade (largely driven by fiscal concerns), or the “de-dollarisation” trade (largely driven by geopolitical concerns around US dollar weaponisation and US/China tension) is now over, as a result of current Middle East events.
If the answer is "yes", then perhaps the gold price high has been reached for this cycle. If the answer is "no", then this period could come to be seen as a buying opportunity.
We think the answer is "no":
- The geopolitical shift from US unipolarity (peaking in the early 2000s) to multi-polar, great power competition, with reduced confidence in globalised institutions and supply chains, is likely to continue in most scenarios (with the exception being a rapid and dominant US/Israeli victory).
- Current events raise the prospect of both stagflation and increased defence spending burdens. Recession probabilities are rising. The fiscal trend of rising debts and deficits in G7 countries will continue. The potential the Iran war comes to be seen as the next fiscal shock seems quite high to us, as is the probability that fiscal outlooks deteriorate.
Even if the crisis becomes prolonged we would expect, once near term knee-jerk selling is exhausted, that gold would begin to break its near-term negative correlation with oil markets.
Gold equities
These have fallen in value by approximately 25% since the start of the war.
Investors are concerned that cost inflation and falling gold prices could materially erode gold producer profit margins. Again, there is a knee-jerk tendency to see the current Iran shock as a potential re-run of the 2022 Ukraine energy shock which ultimately contributed to gold equity underperforming gold bullion.
The biggest difference between now and 2022 is the starting point for producer margins. On an “all-in” basis (total costs including growth capital and cash taxes), margins were around ten times higher at the start of this conflict than they were at the start of the Russia/Ukraine war (approximately US$150/oz in early 2022 vs US$1,800/oz today), as shown in the chart below.
All-in cost margin (US$/oz)
The current huge margin cushion effectively means operational leverage has been reduced significantly. Put another way costs can inflate much faster than gold prices and margins could still expand.
For investors who share our view that the gold bull market is likely to continue there remains a huge amount to like about the gold equity space.