[TMGM Financial Breakfast] US Continues Strikes on Iran as Houthis Block Saudi Shipping – The Next Major Market Move Is Brewing
Although geopolitical tensions continue to support safe-haven demand, a stronger US dollar and rising Treasury yields have weighed on gold prices. With diplomatic negotiations still possible, next week's Federal Reserve meeting is expected to be the key catalyst for markets.
Spot gold edged lower on Monday despite a sharp escalation in Middle East tensions. The ongoing conflict between the United States and Iran intensified further, while Yemen's Houthi movement announced a maritime blockade against Saudi Arabia. The developments briefly pushed oil prices higher, reigniting inflation concerns and strengthening expectations that the Federal Reserve will keep monetary policy tighter for longer.
As a non-yielding asset, gold tends to lose appeal in a high interest rate environment. Although escalating geopolitical risks would normally boost demand for safe-haven assets, the combination of stronger monetary tightening expectations and rising Treasury yields has led to a cautious pullback in gold prices.
The Middle East has entered another period of heightened instability. The United States has carried out multiple consecutive nights of airstrikes against Iranian cities, while Iran's Islamic Revolutionary Guard Corps has launched retaliatory attacks targeting US military assets across the region. Meanwhile, the Iran-backed Houthi movement in Yemen announced a maritime blockade against Saudi Arabia, potentially opening a new front in the regional conflict and expanding energy supply risks beyond the Persian Gulf.
The Strait of Hormuz, one of the world's most important oil shipping routes, has already experienced severe disruptions due to the conflict, with only limited vessel traffic able to pass through. Iranian authorities reported that an oil tanker had caught fire following an attack, while the Revolutionary Guard warned that as long as US military operations continue, not "a single drop of oil" could safely transit the strait.
At the same time, the Bab el-Mandeb Strait is facing growing security threats. The Houthis described the blockade as retaliation against Saudi Arabia's long-standing restrictions, prompting the Saudi-led coalition to announce military operations aimed at safeguarding commercial shipping. Should the Bab el-Mandeb Strait become fully blocked, global crude oil supply could decline by an additional 7%, on top of the estimated 10% supply disruption already caused by the Gulf conflict. Such a scenario would have a significant impact on global energy markets.
These developments have intensified concerns over global energy transportation security and pushed energy prices sharply higher. Although oil prices later retreated on hopes that diplomatic negotiations could ease tensions, they remain elevated overall. Under normal circumstances, heightened geopolitical uncertainty would strengthen gold's appeal as a safe-haven asset. However, those supportive factors are currently being offset by expectations of tighter monetary policy.
Federal Reserve officials have also adopted an increasingly hawkish tone. Cleveland Fed President Beth Hammack indicated that further interest rate increases remain on the table, arguing that additional policy tightening may still be necessary to bring inflation under control. Her comments have set the stage for potentially heated debate at next week's Federal Reserve policy meeting and raised the possibility of dissenting votes.
Against this monetary policy backdrop, the opportunity cost of holding gold continues to rise. Higher interest rates typically reduce the attractiveness of non-yielding assets. As a result, although geopolitical tensions continue to provide some support, gold may struggle to escape short-term downside pressure.
Market Insight:
Gold's recent weakness does not suggest that its safe-haven status has disappeared. Rather, it reflects a short-term tug-of-war between escalating geopolitical risks and increasingly hawkish monetary policy expectations. Given the complexity of the Middle East conflict, market volatility is likely to remain elevated in the near term, while the Federal Reserve's policy decisions will play a decisive role in shaping gold's medium- to long-term outlook.
