The Impact of Middle East Conflict Spillover on Gold Prices

Spillover effects of the Middle East conflict (such as Israel-Palestine conflict expanding to Lebanon/Iran, or the risk in the Strait of Hormuz) on the international gold price are not a one-way rise but a phased process influenced by macro environment dynamics, for the following reasons.

1. In the short-term, during the anticipated conflict eruption stage (before the conflict/early escalation): risk aversion dominates, leading to a rise in gold prices.

2. In the medium term, once the conflict begins, expectations are realized and spillover occurs, the market “buys the rumor, sells the fact.” Hawkish Fed rates lead to dollar strength, which suppresses international gold prices, resulting in gold being prone to decline and increased volatility.

The logic shows that as conflict escalates and pushes up the price of crude oil, it further triggers an inflation rebound. The market bets on the Fed delaying rate cuts or even raising rates; in this scenario, real interest rates rise, the dollar strengthens, carrying costs for gold (a non-yielding asset) soar, and funds shift from gold to U.S. treasuries or the dollar. This forms a reverse chain of “conflict → oil prices → inflation → interest rates → falling international gold prices,” further exacerbated by profit-taking at high levels and liquidity squeezes (institutions selling gold to cover margin calls), often resulting in gold price declines.

3. In the long run, if the conflict’s spillover deepens into an uncontrolled stage, with multiple parties unable to control the situation, market risk aversion will return. Coupled with dual drivers of anti-inflation and “de-dollarization,” this will support a retaliatory rally in international gold prices. If U.S. military strength is insufficient to control the rhythm, further escalation will fully spill over the conflict, causing prolonged energy shortages, out-of-control inflation, and declining trust in the dollar as a fiat currency. The triple attributes of gold’s monetary characteristics, market risk aversion, and “de-dollarization” for anti-inflation protection will return, possibly propelling the international gold price to break the pressures from real interest rates and enter a long-term bull market.

Evaluating the U.S. actions over the past 40 days, whether the U.S. can control the conflict is crucial. From the long-term trend and geopolitical restructuring, the world order is being reshaped; factors like geopolitical fragmentation, “de-dollarization,” and ongoing central bank gold purchases will enhance gold’s long-term allocation value.

Editor | Jiao Yang  Layout | Jiao Yang  Visual | Zhang Zongwei