Oil jumps, gold rallies as Hormuz risk shocks markets and puts inflation back in play

Dubai: Oil and gold surged at the start of the week after the flare-up in the US-Israel-Iran conflict pushed investors toward safety and forced markets to reassess how long higher energy prices could last. Brent crude briefly pushed above $82 a barrel in Asian trading before settling near $78, up roughly 7% on the session, while gold rose more than 2% to nearly $5,400 an ounce in a broad rush for havens. Equity futures weakened, with investors weighing the risk of a longer conflict against already fragile confidence shaped by tariff uncertainty, private credit stress and a market still debating whether the inflation fight is truly over.

The rapid shift in prices highlights how quickly geopolitics translates into financial conditions. Oil sets the tone because energy is the cleanest conduit into inflation, household sentiment and corporate margins, and the Strait of Hormuz sits at the centre of that transmission mechanism.

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Two scenarios and a six month horizon

Samy Chaar, Chief Economist and CIO Switzerland at Lombard Odier, said his team has modelled two scenarios. “We have modelled two scenarios for the US-Israel/Iran conflict. The first, which we see materialising at present, is a scenario of limited escalation and a limited increase in the oil price. The second, which is not our core scenario, is a global oil shock, with a prolonged closure of the Strait of Hormuz and heavy military confrontation, leading to an increase of up to $50 per barrel in the oil price. Importantly, in both cases, we expect the oil price to revert to its recent ranges after six months.”

That framework matters because it suggests markets are trading a risk premium with two possible outcomes rather than a permanent step change in energy pricing. The immediate spike reflects fear of disrupted flows and impaired shipping, while the medium-term path depends on whether the conflict remains contained and whether energy infrastructure avoids serious damage.

The inflation question returns

Oil’s jump revives an uncomfortable theme for policymakers. Higher energy costs can reaccelerate headline inflation quickly and bleed into broader prices through transport, manufacturing inputs and logistics. Nigel Green, CEO of deVere Group, warned that investors are being forced to revisit inflation assumptions. “Investors are now confronting a renewed inflation threat at a moment when price growth in major economies remains above or only just approaching central bank targets.”

He added, “When Brent jumps at this speed, inflation arithmetic changes quickly across developed economies.” He pointed to the Bank of England’s estimate that a 10% rise in Brent can add roughly 0.2 to 0.3 percentage points to UK inflation, arguing that the multiplier is being underestimated. “A sustained move of this magnitude would materially lift headline CPI in the UK. Policymakers who believed inflation was moving steadily back toward target would face renewed pressure.”

The warning extends beyond Britain. “US inflation remains sensitive to fuel costs. Gas prices feed directly into consumer sentiment and inflation expectations. If crude pushes toward $90 or $100, the pass-through into CPI becomes unavoidable,” Green said.

Central banks may look through a mild shock

Chaar’s base case assumes the conflict remains contained enough to keep the inflation impulse modest and temporary. “In our base scenario of limited escalation, we expect an increase in average US headline inflation from 2.5% to 2.6% in 2026, with real GDP growth unchanged at 2.2%, and keep our scenario of three interest rate cuts from the Federal Reserve unchanged, as we would expect the Fed to look through any modest increase in headline inflation.”

That is a critical distinction for markets. A one-off energy spike can lift headline inflation without changing the underlying trend, which is why central banks often focus on measures that strip out volatile components. Rate-cut expectations can still wobble in the short term, but the longer-term policy path depends on whether oil stays elevated long enough to reshape inflation expectations.

Green’s argument is that the behavioural channel can be as important as the mechanical one. “If businesses anticipate persistent input cost increases, pricing decisions adjust pre-emptively. If workers expect higher living costs, wage demands strengthen,” he said. In that scenario, what starts as an external shock can become embedded.

A tougher trade-off in the oil shock scenario

The risk case is where markets start to talk about stagflation again, meaning slower growth with higher inflation. Chaar said that a global oil shock would hit activity measures and complicate the Federal Reserve’s dual mandate. “In the risk scenario of a global oil shock, the effects would include an increase in inflation and a decrease in various activity measures, notably industrial production where energy prices are an important input. Real GDP growth in the US would decrease, and the Fed’s job of balancing its dual mandate would become harder.”

He added that the central bank response depends on whether inflation expectations remain anchored and whether unemployment rises sharply. “If long-term inflation expectations were to remain anchored, as they were throughout the pandemic and during tariff uncertainties, we would expect the Fed to regard the effects on inflation as temporary. If the rise in unemployment were comparatively contained, we would expect it to favour stability over aggressive cuts. However, if the unemployment rate were to rise above 5.5% - a level that is much worse than our model indicates - the Fed would then shift to an aggressive rate-cutting strategy towards 2.5% or lower.”

Outside the US, the burden would fall more heavily on energy importers. “For the other economies, especially in Asia and emerging markets in Europe, the Middle East and Africa, the second scenario would warrant greater downward revision in the real GDP growth and upward revisions in inflation due to their high dependence on energy imports from overseas,” Chaar said.

Gold tracks headlines and the demand for protection

Gold’s surge reflects the same instinct that drives defensive currency strength and volatility hedging during geopolitical shocks. Dat Tong, Senior Financial Markets Strategist at Exness, said safe-haven demand drove the move. “Gold advanced sharply on Monday, reaching its highest level in a month, approaching record territory. Safe-haven demand drove the surge in prices as investors reacted to the flare-up in geopolitical tensions in the Middle East over the weekend.”

He said the broader fear is not limited to direct conflict. “The aggressive rhetoric from the involved parties and disruptions to shipping routes in the Gulf have amplified fears of a broader regional confrontation and a global economic impact, reinforcing gold’s appeal. Beyond the Middle East, persistent instability in Eastern Europe continues to underpin the precious metal.”

He also pointed to a structural pillar under gold. “At the same time, demand from central banks, which have maintained steady accumulation, remains elevated.” Looking ahead, he said, “Gold’s trajectory will remain tightly linked to geopolitical developments. Further escalation could accelerate upside momentum toward fresh historic highs.”

Oil is the gauge and insurance is the mechanism

Julius Baer’s research stated the current moment as a shock with a meaningful risk premium but unclear direction. Christian Gattiker, Head of Research, wrote that claims and counterclaims are moving faster than verification, making strong directional calls premature, while warning that further escalation and persistent disruption of global energy trade flows cannot be ruled out.

Within that framework, oil is the cleanest indicator of whether risk is building or fading. Norbert Rücker, Head Economics and Next Generation Research at Julius Baer, said, “Oil is a fever thermometer for geopolitics and reacts accordingly to the escalating conflict in the Middle East. Put simply, the implications of this conflict for the world economy depend on the flow of oil and gas through the Strait of Hormuz.” He added that the most feared scenario is not the closure itself but serious damage to key infrastructure, and that the base case remains “the usual pattern of a short-lived but more intense spike in oil and gas prices.”

His assessment also captured what traders are watching on the ground. Trade out of the Gulf has “largely ground to a halt for precautionary reasons,” he said, while noting no awareness of significant damage to ships or loading infrastructure and no serious attempts to close the shipping route. That distinction matters because markets can price disruption even when the waterway is technically open, with insurance, freight and route decisions becoming the practical constraint.

Equities feel it through margins and sentiment

Equities typically struggle with sustained energy spikes because higher oil tightens financial conditions and compresses margins, particularly in transport, chemicals and consumer-facing industries. Julius Baer’s equity strategy team warned that elevated index levels increase near-term vulnerability, even if history suggests geopolitical shocks can be short-lived. The same note pointed to sector dispersion, with cyclicals and transport more exposed while oil and gas stocks can act as a partial hedge.

Ipek Ozkardeskaya, Senior Analyst at Swissquote, described how the initial shock pushed oil and gas prices higher at the weekly open and cast a shadow over OPEC’s planned output increase. Her core message was that the longer tensions persist and the wider they spread, the greater and more durable the impact on energy prices and inflation, with stagflation risks re-emerging depending on duration.

Bonds face a familiar tug of war

Bond markets sit at the intersection of two forces. Safe-haven demand typically lowers yields, while an oil-driven inflation shock can push yields higher. Dario Messi, Head of Fixed Income Analyst at Julius Baer, said investors will focus on US Treasuries to reassess their safe-haven characteristics, noting that yields have shown reduced sensitivity to rising crude prices so far this year, particularly when driven by supply disruptions rather than demand, which could allow safe-haven flows to dominate in the near term.

That balance is central to the week ahead. If oil settles back and shipping conditions improve, the risk premium can fade quickly and investors can refocus on macro data and earnings. If disruption persists and oil keeps grinding higher, the inflation story returns to the centre of policy expectations, and markets will have to reprice the path for interest rates, growth and risk assets all over again.

- With inputs from agencies.