Middle East Turmoil Triggers Stagflation Alert, Why Safe-Haven Asset Gold Fails

How do real interest rates affect the safe-haven function of gold?

The escalation of Middle East tensions has shaken global markets, intensifying asset price volatility and raising concerns about stagflation.

Over the past two weeks, major assets such as crude oil, gold, and stocks have experienced sharp fluctuations with notable divergence. International oil prices briefly broke through $100 per barrel and remained volatile at high levels, with gains approaching 80% year-to-date; meanwhile, gold, amid rising risk aversion, declined rather than rose, with nearly a 10% monthly drop; Asia-Pacific stock markets overall came under pressure, with major indices in Japan and South Korea falling over 7% this month.

At the same time, the world faces a “super central bank week.” On March 18, the Federal Reserve announced it would keep the federal funds rate between 3.50% and 3.75%; major economies like Japan and Canada also chose to hold rates steady. Although policy rates remained unchanged, many central banks mentioned in their statements that rising geopolitical uncertainties could pressure inflation and economic growth prospects.

Industry experts believe that as concerns over energy supply security intensify, transportation risks in the Strait of Hormuz are quickly factored into oil prices. Inflation expectations have risen accordingly and spread across various assets through interest rate and exchange rate channels. Market worries have shifted from simple supply and demand to the impact of geopolitical risks on supply chains.

Market Enters a High-Volatility Stage

From price movements, the current volatility originated mainly in the energy market. Since March, international oil prices have remained high and volatile. WTI crude briefly surpassed $100 per barrel at the start of the month and has since pulled back to $96.41 per barrel, up nearly 68% year-to-date; ICE Brent crude stayed around $108 per barrel, with a monthly increase of nearly 50% and an overall rise of about 80%. Such rapid increases reflect a market re-pricing of supply risks.

Oil price trends are driven by specific events. Early last week, signals from the U.S. suggesting potential easing of conflict caused prices to dip; however, Iran’s statements denying a ceasefire quickly revised expectations upward, pushing prices higher again. Analysts generally agree that the key variables now focus less on supply-demand fundamentals and more on geopolitical risks affecting transportation and supply stability.

In this context, the Strait of Hormuz has become a critical variable. It accounts for about 19% of global oil transportation. Any disruption would directly raise energy prices and transmit inflation expectations to other assets. HSBC China notes that even short-term disturbances can trigger significant oil price swings, and the market has not fully priced in this uncertainty.

Rising oil prices boost inflation expectations and constrain monetary policy paths. Meanwhile, a strong dollar and tightening liquidity margins have prevented gold, a traditional safe haven, from maintaining its previous gains, leading instead to a notable correction. On March 19, international gold prices briefly fell to $4,747.5 per ounce, down about 9.5% this month, breaking a seven-month rising streak. Silver experienced an even sharper decline, dropping over 20% this month.

This performance contrasts with past geopolitical conflicts where gold typically rose. Market analysts attribute this mainly to the current macro environment dominated by interest rate and liquidity factors. On one hand, rising oil prices increase inflation expectations, reducing expectations for Fed rate cuts; on the other hand, liquidity disruptions in the U.S. private credit market have strengthened dollar demand, keeping the dollar index near 100. “Under the dual influence of rising real interest rates and a strong dollar, gold faces short-term pressure,” said Qu Rui, Senior Deputy Director of Research and Development at Orient Securities.

Stock market adjustments are also the result of rising inflation expectations, reconfigured interest rate paths, and declining global risk appetite. On March 19, major Asia-Pacific indices all declined, with the Nikkei 225 down 3.38% that day and a total decline of 9.31% this month; South Korea’s Kospi fell 2.73% on the day and 7.7% overall this month. Saudi stocks dropped 14.66% this month. Globally, markets have shifted from earlier structural divergence to more synchronized adjustments.

Institutional analysts note that Asian markets are more sensitive to oil prices. Manulife Investment’s Asia Equity and Fixed Income teams told reporters that economies heavily reliant on energy imports, such as Korea, India, and the Philippines, may face short-term pressure; while energy-producing economies like Malaysia and Indonesia are more resilient. Overall, Asian market performance still depends on how long high oil prices persist and whether energy transportation is disrupted.

Will the Economy Fall into Stagflation?

In this asset adjustment cycle, discussions about stagflation have intensified. Citibank’s Chief Investment Officer states that sharp oil price increases are heightening the risk of stagflation—where inflation rises while growth slows. Amid rising uncertainties, investors are refocusing on high-quality growth assets.

However, some believe that the environment has not yet entered a typical stagflation phase. Guo Jin Securities strategist Mu Yiling points out that with the development of renewable energy, oil’s share in the global energy mix continues to decline, weakening its economic impact compared to historical levels. Even with rising oil prices, extreme levels would be needed to recreate past stagflation shocks. Major economies are still in recovery, and asset price adjustments mainly reflect valuation and expectation realignment.

Subtle policy changes add new uncertainties. On March 18, the Fed kept rates unchanged at its latest meeting, maintaining the 3.50%-3.75% range, in line with expectations. The statement for the first time mentioned uncertainties related to Middle East geopolitics. Bai Xue, Senior Deputy Director of Research and Development at Orient Securities, said this indicates geopolitical risks have shifted from peripheral factors to key influences on policy, and the Fed has entered a cautious wait-and-see phase, with less room for rate cuts this year.

UBS Wealth Management’s report suggests that despite unchanged policy rates, the overall tone remains accommodative, and the Fed may start rate cuts around mid-2026. However, rising inflation expectations have pushed back the timing of rate cuts further. Standard Chartered points out that rising oil prices not only boost inflation but may also dampen economic growth, complicating policy outlooks.

Other major central banks show divergent policies. The Reserve Bank of Australia continues to hike rates by 25 basis points, citing inflation risks; Indonesia’s central bank removed references to potential rate cuts, signaling a cautious stance; the Bank of Japan kept rates at 0.75%, but the voting on the rate decision showed divided views on the pressure from Middle East conflicts. “Overall, amid geopolitical conflicts and inflation pressures, global monetary policy is shifting from easing to a wait-and-see stance,” said industry experts.

Energy Remains a Key Variable

Looking ahead, many institutions believe market trends will heavily depend on developments in the Middle East, especially the Strait of Hormuz. HSBC China expects that, under baseline scenarios, conflicts may last several weeks but won’t fully disrupt energy transportation. Oil prices are likely to stay high and oscillate, gradually easing as risk premiums decline, possibly falling back to around $77 per barrel in six months.

Yinhe Securities strategist Yang Chao warns that if conflicts become prolonged, transportation risk premiums could persist, leading to a low-growth, high-interest-rate, high-volatility global environment; if conflicts escalate to cause transportation disruptions, it could trigger imported inflation and exacerbate stagflation risks.

Despite short-term volatility, institutions remain rational about medium- and long-term asset prospects. UBS Wealth Management notes that historical data shows markets tend to perform well in the year following sharp fluctuations. Long-term holding strategies remain attractive, provided diversification is maintained.

Regarding specific allocations, many recommend reducing concentration in single assets to enhance portfolio resilience. For stocks, diversification across sectors and regions is advised, focusing on high-quality companies with strong profitability and cash flow. For bonds, investment-grade bonds are supported by safe-haven demand, while high-yield bonds may face pressure.

Gold, despite short-term pressure, is still viewed as an important hedge against geopolitical risks and currency fluctuations. Standard Chartered suggests gradually increasing gold holdings during price corrections and using inflation-linked bonds to hedge inflation risks.

Alternative asset allocations are also gaining attention. UBS believes hedge funds and private markets, due to their low correlation, can improve portfolio stability. In the current volatile environment, some investors may use structured products to control downside risk while participating in potential market gains.

HSBC China proposes a “barbell strategy”: investing in high-growth sectors like AI and technology on one side, and high-dividend assets and quality bonds on the other, to balance risk and return amid uncertainty.