Gold rose more than 2% towards $5,400 after reports of continued US and Israel attacks on Iran. It opened with a bullish gap of about $17 and moved higher during early Asian trading.
At the time of writing, gold was up 1.50% on the day at about $5,350. Traders were monitoring the conflict for signs of how long it may continue.
Oil Shock And Safe Haven Demand
Iran has stopped oil shipments through the Strait of Hormuz, pushing up oil prices and increasing inflation expectations. This has supported demand for gold.
Gold has long been used as a store of value and a medium of exchange. It is also used in jewellery and is often bought during periods of market stress.
Central banks are the largest holders of gold and use it to diversify reserves. They added 1,136 tonnes of gold worth around $70 billion in 2022, the highest annual total since records began, with China, India and Turkey increasing reserves.
Gold often moves inversely to the US Dollar and US Treasuries. Its price can also react to geopolitical risk, recession fears, and changes in interest rates, and it is priced in US dollars as XAU/USD.
Market Volatility And Hedging
With gold surging past $5,300, we must prepare for sustained volatility in the weeks ahead. This initial price jump is a direct reaction to the conflict in the Middle East, a classic flight-to-safety trade that has much further to run. Derivative traders should be looking at call options on gold, as strikes at $5,500 and even $6,000 are now in play if the conflict escalates.
The market’s fear gauge, the VIX, has already spiked over 40% to 38, its highest level since the banking turmoil we saw back in 2025. This makes buying options more expensive, but hedging long equity portfolios with index puts is now critical. We anticipate that implied volatility will remain elevated as long as geopolitical tensions are the primary market driver.
Iran’s closure of the Strait of Hormuz is the most significant factor for broader inflation. Brent crude has already jumped 15% to over $120 a barrel, a level that will directly translate into higher energy costs and pressure central banks. This reinforces the case for gold as an inflation hedge, a trend we saw building throughout 2025 when global inflation averaged a stubborn 4.1%.
This is not the time for complacency in risk assets, as the inverse correlation is playing out perfectly. As we have seen in past crises, like the initial shock of the Ukraine war in 2022, equity markets will likely trend lower as capital seeks shelter. We are seeing S&P 500 futures pointing to a sharply lower open, with traders already pricing in heightened risk.
While the US Dollar is also a safe haven, the sudden inflation shock from oil complicates its trajectory. A stronger dollar would typically cap gold’s gains, but the market is now betting that persistent inflation could force the Federal Reserve into a difficult position regarding interest rates. Watch the DXY index closely, as any weakness below the 102 level could provide another major tailwind for gold.
Remember that central banks have been providing a strong floor for the gold price. We saw them continue their record-breaking purchases through 2025, adding over 1,000 tonnes to reserves in a clear move to de-dollarize. This underlying demand suggests that any dips in the gold price will be viewed as buying opportunities by very large players.
